Although 9M16 results came in above expectations due to the lower-than-expected losses from the settlement of hedging contracts, its underlying operating numbers are still weak. No dividend as expected. Post-results, we are forecasting the group to record lower core NL of RM9.2m after accounting for lower losses on settlement from currency hedging contracts. Although its valuation has already bottomed out, we see no immediate rerating catalyst to warrant an upgrade. Maintain MARKET PERFORM with unchanged TP of RM0.41, based on a targeted 0.4x FY17E BVPS.
9M16 results above. NOTION recorded 2Q16 core net profit (NP) of RM2.5m, narrowing 9M16 core NL to RM5.9m vs. our FY16E core NL of RM12.2m. Note that the 9M16 core NL has been adjusted by excluding: (i) fair value gains for a mark-to-market position on its USD foreign currency hedging contracts of RM18.5m, (ii) inventories write-off amounting to RM6.5m, (iii) gains on disposal of assets amounting to RM0.2m and (iv) under-provision of prior year deferred taxation of RM5.6m arising from unallowable expenses. The positive deviation was due to the lower-than-expected losses from the settlement of hedging contracts. No dividend was declared during the quarter, as expected.
YoY, 9M16 revenue decreased by 7% with growth from stronger Auto/Industrial sales (+18%) negated by weaker HDD (-10%) and Camera (-26%) segments. Looking at the bright spot, Auto/Industrial segment registered decent revenue growth of 18% due to a low base coupled with higher order from its automotive customers for braking systems components. While its revenue share also expanded by 7%, this was not enough to offset the weakness in both HDD and Camera segments, which continued to see soft demand from end markets. Meanwhile, at the group’s bottom line, core LATAMI widened to RM5.9m with EBIT margin shrinking to 4.1% (from 18.3% in 9M15) on lower operational efficiency.
QoQ, despite better sales in Camera (+8%) and Auto/Industrial segments (+4%), 3Q16 revenue decreased by 6% dragged by lion’s share HDD segment (-20%) due to lower order from a major customer. However, at the bottom line, with lower losses from the settlement of hedging contracts coupled with higher other operating income (of RM6.6m vs. RM1.8m in 2Q16 which consists mainly the sales of scrap metal), the group recorded CNP of RM2.5m compared to CNL of RM5.0m in 2Q15.
Softness persists in the group’s key revenue contributors. Sales from the Auto/Industrial segment should remain resilient on the back of new orders from new customer. However, sluggish PC shipments as well as muted consumer spending seen in the Interchangeable Lens Type market could continue to drag HDD and Camera segments. As measures to counterbalance the sluggish business, the group mentioned in its note that it is considering to set up a precision machining plant to cater for local MNC business that it has identified. On top of that, the Board also does not discount the possibility of entering into the Biomass business. While management keeps its lips tight on the details of the above mentioned, we understand that the deal could be sealed as soon as in a few months’ time.
Post-results, we forecasted the group’s FY16E bottom line to record narrower core net losses of RM9.1m after accounting for lower losses on settlement from currency hedging contracts. Meanwhile, no changes are made to our FY17E earnings as we maintain our assumption on revenue drivers.
Maintain MARKET PERFORM with unchanged TP of RM0.41, on a targeted 0.4x FY17E BVPS. Although its valuation has already bottomed out (trading close to -1SD below its average 5-year mean forward PBV of 0.34x), we see no immediate re-rating catalyst to warrant an upgrade.
Source: Kenanga Research - 19 Aug 2016
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