• Set for a rebound

• Higher gear in the automotive segment

• Stronger balance sheet allows it to expand capacity

• Not rated with FV of RM0.98 based on FY18F PER of 11x

Business Overview:

Notion VTec Bhd (Notion) is a precision parts maker that derives its income from three main segments: hard disk drive (HDD), digital camera, automotive and industrials. It owns more than 1500 computer numeric control (CNC) machines in its operating facilities that are located in Klang, Johor and Ayutthaya, Thailand. Its major customers are MNCs from Europe and Japan.

Investment theses:

1. Set for a rebound. After a series of unfortunate events (see Exhibit 1) that dragged down Notion’s profit in the previous years, the company is set to start its growth journey with a clean slate. We expect FY17F and FY18F to register profit growth driven by the expansion of its core business and potential new product lines.

2. Higher gear in the automotive segment. Notion is increasing the production capacity for automotive parts used in the electronic braking system (known as plungers). In FY16, the company manufactured 13m pieces of plungers for two of its major customers ZF Friedrichshafen AG and Continental AG. We expect improving demand for these components in FY17F and FY18F.

3. Net cash of RM21.37m as of Sep 30, 2016, which means that 9.6% of Notion’s market value is net cash. The company was also in a net cash position of RM5.7m in FY15. Notion declared a dividend of 2 sen for FY16. We expect the company to pay out about 35% of its net profit in FY17F and FY18F. The company can also expand its operations and product offerings with the cash.

4. Expect normalised earnings growth of 20.7% in FY17F and 26% in FY18F. Excluding the one-off events previously, we believe the company can grow further in FY17F and FY18F as it strengthens its footing and focuses on building its core businesses. We do not foresee huge forex losses as management indicated that it would go on spot rates rather than contracts.

Valuation:

We ascribe a fair value of RM0.98 on Notion based on 11x PER of FY18F. We estimate its FY18F EPS to be 8.88 sen. The 11x PER is based on FBM Small Cap Index’s forward PE of 11x.

Source: MIDF Research - 13 Feb 2017