While the group’s FY16 reported EBIT was well within our expectation (at 102% of our FY16E EBIT), its CNP of RM2.6m was above expectation due to lower-than-expected losses from the settlement of hedging. An interim tax-exempt DPS of 1.0 sen was also a positive surprise. Post full year results, we tweaked our FY17E NP by +4% for house-keeping purposes. With the improving earnings prospect as well as the rock-bottom valuation which offers a better risk-toreward ratio, we upgrade our rating to OUTPERFORM with a higher TP of RM0.43. This is still based on a very conservative targeted 0.4x FY17E BVPS.

FY16 results above. NOTION recorded a 4Q16 core net profit (NP) of RM8.4m, reversing FY16 bottom line to core NP of RM2.6m. While the group’s FY16 reported EBIT and PBT (ex-derivatives) was well within expectations, at 102% and 104% of our FY16E EBIT, respectively, CNP of RM2.6m was above our forecast CNL due to the much lower-thanexpected losses from the settlement of hedging. Note that the FY16 CNP has been adjusted by excluding: (i) fair value gains for mark-to-market position on its USD foreign currency hedging contracts of RM21.8m, (ii) inventories and equipment write-off amounting to RM12.3m, (iii) underprovision of prior year deferred taxation of RM9.9m arising from unallowable expenses, and other non-core items amounting to RM3.362. To our positive surprise, an interim tax-exempt dividend of 1.0 sen was declared.

YoY, FY16 revenue decreased by 4% with growth from stronger Auto/Industrial sales (+17%) negated by both weaker HDD (-4%) and Camera (-24%) segments. Looking at the bright spot, Auto/Industrial segment registered decent revenue growth of 17% due to a low base coupled with higher order from its automotive customers for braking systems components. Meanwhile at the group’s bottom line, CNP was recorded at RM2.6m (vs. 9M16 CNL of RM5.9m) due to much better EBIT margin recorded in 4Q16 (10.2% vs. 5.9% in 4Q15) on the back of better sales and yields performance from both HDD and Automotive segments in 4Q16. Note that this is also at the absence of huge losses from settlement of hedging in 2H16. QoQ, 4Q16 sales improved by 12% driven by stronger performance in HDD segment (+37%) as well as normalization from low sales base in Camera segment (+6%). On a closer look at HDD segment, we understand from management that the group has secured new orders from a subsidiary of a giant HDD manufacturer, which could continue to see sustainable growth going forward. With higher operational efficiency as well as lower losses from settlement of hedging, the group recorded CNP of RM8.4m compared to CNP of RM2.5m in the 3Q16.

Lights at end of tunnel. We were delighted to gather that the existing foreign currency hedging contracts have expired, as according to its announcement. Operational-wise, we expect to group to register growth in FY17 with an absence of losses from hedging contracts settlement. While weak demand for Interchangeable Lens Type products could continue to drag its Camera segment, we believe the upcoming orders from HDD segment and resilient demand from Auto/Industrial segment should be sufficient to offset the weakness. Note that the current product mix for HDD/Camera/Auto is 49%:21%:30%. Also, the expansionary move into CNC machining in Johor is going as planned with initial production starting in Dec 2016. FY17 Capex is expected to be RM30m.

Upgrade to OUTPERFORM with a higher TP of RM0.43 (from RM0.41). Post full year results, we tweaked our FY17E NP up by 4% for house-keeping purposes. Even at a very conservative valuation which is pegged close to the group’s -1SD PBV (at 0.4x FY17E BVPS), our prescribed TP warrants a total upside of 19% (inclusive of dividend yield). Coupled with the improving prospect as well as the rock-bottomed valuation which offers a better risk-to-reward ratio, we upgrade our rating to OUTPERFORM. Risks to our call include: (i) slower-than-expected sales thus lower operational efficiency, (ii) losses from the settlement of hedging contracts, and (iii) adverse currency fluctuations.

Source: Kenanga Research - 25 Nov 2016