1H17 result was within expectations. While a 2nd interim DPS of 0.75 sen was expected, POSITIVE SURPRISE was on the special DPS of 0.75sen which reflected management’s commitment to reward investors. Post result, while we made no changes to our FY17E/FY18E earnings, our FY18E EPS has been revised to 10.7sen from 10.2sen to reflect the latest issued share capital post-completion of corporate proposals. Maintain OUTPERFORM with a higher TP of RM1.66.

1H17 on track. NOTION recorded 2Q17 core net profit (NP) of RM4.4m, bringing 1H17 core NP to RM9.8m which made up 39%/40% of ours/consensus FY17E earnings. We deem the results to be within expectations as we are expecting stronger 2H17, which will be boosted by (i) the stack-up orders from Automotive segment (plungers/pistons for EBS components) as well as (ii) new orders from Engineered products with the emergence of new customers and capacity expansion in Johor plants. On the dividend side, while the quantum of second interim tax-exempt DPS of 0.75 sen was expected, we were positively surprised by the management’s commitment in rewarding investors by issuing a special dividend of 0.75sen, bringing YTD DPS to 2.3sen (vs our full year 3.0sen).

YoY, 1H17 revenue grew strongly by 16% thanks to the growth from all segments with marginal support from stronger USD (+2% to avg RM4.34/USD). Topping the list, the Auto segment jumped 29% on higher production ramp-up from plungers (for Automotive ABS application) followed by strong growth from Engineered products (+21%). More positively, at the operation level, EBIT soared 464% 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 the low base in 1H16. QoQ, 2Q17 sales marginally grew by 1% on weaker seasonality. With operational deleveraging, core NP dropped by 18%. On a closer look at the 2Q17 core NP of RM4.4m, one should take note that the quarter’s core NP was without much of the usual element of forex gains, but mainly reflective of the group’s underlying operational strength.

Brighter prospect ahead. The near-term earnings driver - the stack-up additional orders of Automotive EBS components from its new customer are intact. All in, for Automotive segment, the total volume growth could at least see a 2-year CAGR of 30% with another 50 CNC machines to be invested next year. For the HDD segment, management is seeing its 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 reallocating the capacity in the Camera segment to cater for better margins and higher resiliency products. These new fatter margins products are seeing better prospects with the emergence of new customers. All in, the ideal mix for HDD/Engineered Products/Auto is set at 30%:40%:30% in 2018. Meanwhile for the recent 10% placement exercise as well as the warrants conversion, the group has since raised a total of RM61.3m cash to facilitate the expansion of its operation.

Maintain OUTPERFORM with a fully diluted TP of RM1.66 (from RM1.58). Post model update, while we made no changes to our FY17E/FY18E earnings, we have (i) adjusted our share base assumption from 343.6m (which was our previous base case assumption for the maximum scenario of warrants being fully exercised and a proposed private placement), to 330.0m to reflect the latest issued share capital after the abovementioned corporate proposal as well as (ii) revised our FY17E DPS to 3.8sen from 3.0sen. All in, our FY18E EPS has been revised to 10.7sen (from 10.2sen). Hence, with an unchanged forward PER of 15.5x being ascribed (represents the group’s up-cycle valuation of +1SD), our new TP is raised to RM1.66, implying a total upside of 30% (coupled with dividend yield of 3.1%). Maintain OUTPERFORM.

Risk to our call include: (i) slower-than-expected sales resulting in 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 May 2017