A fire outbreak had occurred in NOTION’s main manufacturing plant in Klang, which could affect up to c.50%-60% of its total production capacity. However, the full financial and operational impact of the incident is yet to be ascertained. While we understand from management that the assets and the potential earnings losses could be fully covered by insurance coverage, we prefer to stick on the conservative side for now, which led us to cut FY18E earnings by 54%. With a more conservative 0.65x FY18E PBV valuation being ascribed, we derive our TP of RM0.73.

Major fire outbreak at Klang’s main factory. According to the Bursa announcement, a fire had occurred at its main manufacturing plant in Klang (which mainly produce HDD, camera and automotive parts). The incident affects Kaiten Precision Sdn Bhd, Notion Venture Sdn Bhd and Autic Mekki Sdn Bhd (all are wholly-owned subsidiary companies), and the plant belongs to Notion Venture Sdn Bhd located at Jalan Meru, Klang, Selangor (Lot 6123). Recall that in end-2012, a fire also broke out at the rear building of this main manufacturing plant with losses of about 100 computer numerical control (CNC) machines and affected 25,000 sq ft of its production space. There was a disruption to Kaiten Precision Sdn Bhd’s business for up to 6 months when the fire claim was initiated. The insurers then took 9-12 months to reimburse the company >RM30m for the fire loss as well as business interruption loss.

Further details on the incident. From our preliminary understanding from the management, we gather that the main plant has been severely damaged with as much as c.50%-60% of the production capacity affected. Meanwhile, the number of CNC machines affected was about 500 units out of the group’s total 1,600 machines. While management has yet to ascertain the full financial and operational impact of the incident, our preliminary understanding is that the assets losses as well as the potential earnings losses could be, in best case scenario, fully covered by its insurers. However, the gestation period could be longer than the previous incident (which was 6 months) considering the more severe impact this time around.

Back-of-the-envelope calculation on worst case scenario. On the asset losses, we believe the impact could be easily more than c.RM125m with breakdown being: net book value of RM23.6m for its Lot 6123 premise as well as RM100m for CNC machines (assuming RM200k for each of the 500 units). Meanwhile on the core earnings impact, with our base case assumption which had factored-in the preliminary guidance, potential gestation period, as well as the opportunity costs (assuming 50%-60% of the production affected for its HDD, camera as well as automotive production), our FY18E revenue could be lowered by 43%, which might impact our FY18E NP forecast by -54% to RM15.5m. That said, not all are gloom and doom as we understand that the new earnings driver, which are the new Consumer Electronics products (to be produced in Johor plant) are unaffected and are still on track for delivery to anchor its FY18 earnings.

Downgrade to MP with a more conservative TP of RM0.73 (from RM1.55). We prefer to stick on the conservative side for now given the major disruption to its production capacity which could lead to the uncertainty in earnings visibility. With 0.65x FY18E PBV being ascribed (which is the group’s 5-year average PBV), our TP is now at RM0.73 from RM1.55 which implied FY18E PER of 15.5x.

Source: Kenanga Research - 23 Oct 2017