NOTION has proposed a 10% placement, which will enlarge its share base up to 343.6m (or min. 297.3m from 268.3m). Gross proceeds will be used for capacity expansion in precision manufacturing. While it appears to be short-term dilutive, the move is essential and LONG-TERM positive to the group especially given its improving customer strike rate and products diversification. Fully-diluted TP is at RM1.58 (from RM1.62) with our OUTPERFORM call remains. Private placement of 10%. NOTION plans to place out up to 31.0m (on fully-diluted basis stemming from full warrants and Long-term incentive plan (LTIP) Options conversion) or minimum 26.8m shares, representing c.10% of the issued and paid-up share capital, to investors to be identified later. The proposed private placement may be implemented in one or more tranches within a period of six months from the date of the approval from Bursa Malaysia with the final issue price for each tranche to be determined separately in accordance with market-based principles.

Cash infusion of up to c.RM77m to the group. Note that the group’s warrant: NOTION-WB (1-for-1 Uncovered American Call Warrant, outstanding warrants of 38.6m with exercise price of RM1.00) that is poised for expiration on 2nd May 2017, is already In-The-Money. In the Blue-sky scenario (which is also our adopted assumption), assuming full conversion of 38.6m warrants which could generate cash up to RM38.6m to the group, coupled with the placement that could issue up to 31.0m shares with cash generated up to RM37.2m (assuming indicative issue price of RM1.20, being its latest closing price), and LTIP conversion (to RM2.8m), total cash infusion could be up to RM77.0m.

NET POSITIVE to the group. Although there could be short-term dilutive (of min. 10% up to 28% assuming no earnings contribution from cash infusion; after accounting for full warrants conversion, full LTIP exercised and placement impact), we are POSITIVE on the exercise as we view that the total cash infusion of min. RM37m to c.RM77m will be handy for the group to expand its business. As per the announcement, the proceeds from the proposed private placement will be used to purchase additional CNC machines to facilitate the expansion of its operation in manufacturing HDD, automotive and engineered products to cater for its diversification plan to reach new markets and businesses as well as working capital; of which the group is already doing currently. In our assumption, the cash infusion of RM77.0m, assuming a conservative ROI rate of 10%, will add up to RM7.7m to the group’s FY18E NP. Bright prospect. The near-term earning driver namely the stack-up orders of Automotive EBS components from its new customer are intact. 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. For the HDD segment, management is seeing orders from third-party machining as well as adoption of helium drive (for nearline enterprise) to supersede industry growth. Meanwhile, for Engineered products segment, the group has rejigged its portfolio by allocating the capacity in the Camera segment to cater for better margins and higher resiliency products. These new fatter margin products are bearing fruits with the emerging of few new customers. All in, the ideal mix for HDD/Engineered Products/Auto is to 30%:40%:30% in 2018.

Maintain OUTPERFORM with a fully diluted TP of RM1.58 (from RM1.62). With the base case assumption on: (i) full dilution with enlarged share base of 343.6m, (ii) cash infusion of c.RM77 with a conservative ROI of 10%, thus leading to FY18E NP of RM35.2m, our fully-diluted TP is RM1.58 (from RM1.62), still based on an unchanged PER of 15.5x, being the group’s up-cycle valuation of +1SD, given its superior earnings prospect as well as 2-year PEG of 0.4x). Maintain OUTPERFORM.

Source: Kenanga Research - 03 Apr 2017