INVESTMENT HIGHLIGHTS

• 1QFY17 above expectation

• Better product mix boosts profitability

• Expect stronger earnings due to improved outlook

• Not rated with FV of RM1.14 based on FY18F PER of 11x

1QFY17 above expectation. Notion VTec’s (Notion) 1QFY17 net profit of RM6.44m earnings came in stronger than expected as it makes up 34% of our full year forecast and 30% of consensus’. We believe that it is due better than expected GP margins. Notion’s latest GP margin came in at 21.3%, which is higher than the 14% recorded in FY15. We believe the improvement of GP margin is due to the change in product mix. The latest product mix is HDD: Automotive: Engineered Products of 40%: 32%: 28% compared to 41%: 30%: 29% in the previous corresponding quarter. The automotive and engineered products generally command better margins compared to HDD. Interim dividend of 0.75 sen per share is announced and this is within our expectation.

Auto segment grew 22% qoq. The auto segment is growing in-line with the 20% to 30% range as anticipated. We expect further growth as the company plans to further boost its production capacity for the electronic braking system plungers. The company has bought 50 CNC machines to be installed in Q2 and Q3 to support its production expansion, particularly in anticipation for the 30% growth in demand for its auto segment.

Hard Disk Drive (HDD) arm holding strong. The HDD segment grew 11% qoq, and 2% yoy. Notion has shipped 112 million units compared to 100 million units previously due to a shortage of flash chip that affected SSD supply. That in turn increases the demand for HDD and led to a tight supply. We expect demand for HDD to remain strong in the next few quarters as the shortage of SSD is expected to last until end-2017. We assume a 5% yoy growth for HDD sales.

New offering of engineered products going as planned. The company’s plan to diversify its product offering is going well as it has secured two new customers to produce industrial products. The company expects new orders from fasteners, engineered products and electrical consumer goods in the coming quarters. On top of that, it is also exploring engineered products for aerospace parts.

Quarterly dividend payout of 30% announced. The company has also announced a dividend policy of a minimum 30% payout of its recurring net profit starting FY17. We are positive towards the company’s commitment to reward shareholders on a quarterly basis as it also shows the management’s dedication to sustain the company’s operating profitability.

Expect stronger earnings due to improved outlook. Notion’s operating outlook has turned out better than expected supported by the positive outlook in its main business segments. A strong USD is also favourable for the company as it exports most of its products. On top of that, we expect better operating efficiency with the new CNC machines. Coupled with better product mix, which is expected to garner higher GP margin, we have increased our FY17F and FY18F earnings by 21% and 16.7% respectively.

Higher FV of RM1.14. Our FY18 EPS has been increased to 10.36 sen (from 8.88 sen). Hence, we increase our fair value to RM1.14 from RM0.98, which is derived from 11x PER of FY18F EPS. The 11x PER is based on FBM Small Cap Index’s forward PE of 11x.

Source: MIDF Research - 24 Feb 2017