1Q17 results came in within our expectation. While an interim tax-exempt DPS of 0.75 sen was expected, POSITIVE SURPRISE was on the management’s commitment in rewarding investors by forming dividend policy of minimum 30% PATAMI, to be paid out quarterly. Post results, our FY17E/FY18E CNPs have been increased by 6%/7% for stronger USD/MYR assumption alongside quarterly updates. We reaffirmed our POSITIVE conviction on NOTION given its superior earnings prospect. Maintain OUTPERFORM with a higher rollover TP of RM1.13 (based on 11.0x FY18E PER).

A good start for the year. NOTION recorded 1Q17 core net profit (NP) of RM5.4m, which made up 26% of our FY17E earnings. Note that the core NP has been adjusted by excluding the gain on disposal from PPE. While the quantum of an interim tax-exempt DPS of 0.75 sen was expected (made up 25% of our FY17E DPS), we were delighted by the management’s commitment in rewarding investors by forming dividend policy of minimum 30% PATAMI, to be paid out quarterly.

YoY, 1Q17 revenue grew strongly by 12% thanks to the growth from all segments with marginal help from stronger USD (+1% to RM4.32/USD). In particular, Auto segment jumped by 28% with higher production ramp-up from plungers (for Automotive ABS application). More positively, at the operation level, EBIT soared by 108% driven by: (i) better product mixes, (ii) better utilisation of CNC machining as well as (iii) the absence of settlement for adverse currency hedging alongside of low base in 1Q16. QoQ, 1Q17 sales improved by 14%, led by better sales from Automotive segment. Note that the numbers were also augmented by favourable currency translation (+7% to RM4.32/USD). With higher operational efficiency as well as the absence of losses from settlement of hedging, the group recorded PBT of RM9.0m (+59%).

Brighter prospect ahead. Our optimism stems from the stacking up of orders for the near term growth driver- plungers for the Automotive ABS application. Note that additional 25 CNC machines (with another 25 upcoming) have been allocated for higher orders from its new customer. All in, for Automotive segment, the total volume growth could see a 2-year CAGR of 30% with another 50 CNC machines to be invested next year. Meanwhile for Camera segment, while demand continues to fluctuate, the unutilised capacities have been catered for orders from few more new customers, with new products categorised in the Engineered products segment. For the HDD segment, while the industry is seeing modest growth, management is confident of bucking the trend given the orders from third party machining as well as adoption of helium drive. Meanwhile, the recent news on SSD supply constraint (with HDD as a substitution) could also be the short-term booster. Note that 1Q17 product mix for HDD/Engineered Products/Auto was 40%:28%:32% and the ideal mix for HDD/Engineered Products/Auto is to be 30%:40%:30% in 2018.

Maintain OUTPERFORM with a higher rollover TP of RM1.13 (from RM0.85). Post model update, while we made no major changes to our FY17E/FY18E earnings drivers (except for quarterly numbers updates), we impute a strong USD/MYR assumption of RM4.40/USD (from RM4.30/USD previously) which led to an increase of 6%/7% to our FY17E/FY18E CNP. To better reflect its growth prospects, we have also rolled over our valuation base year to FY18. All in, with an unchanged forward PER of 11.0x being ascribed, our new TP is raised to RM1.13, implying a total upside of 33% (coupled with dividend yield of 4.5%). Maintain OUTPERFORM.

Risks to our call include: (i) slower-than-expected sales thus lower operational efficiency, (ii) losses from the new settlement of hedging contracts, if any, (iii) implications of trade wars arising from Trump’s policy, and (iii) adverse currency fluctuations.

Source: Kenanga Research - 24 Feb 2017