Notion’s FY13 core earnings of MYR15.5m (-73% y-o-y) were within our expectation  but  below  consensus  estimate.  The  weak  results  were mainly  due to slower sales and higher opex. We maintain NEUTRAL on the stock as we think it is fairly priced now.  Our FV is unchanged at MYR0.74, based on 8x CY14 EPS, in line with its 7-year historical P/E.

• In  line.  Notion’s  FY13  core  earnings  of  MYR15.5m  (-73%  y-o-y)  were within our estimate but missed consensus’,  representing  105% and 88% of the  respective forecasts.  The weak  showing  was primarily due to: i) a slowdown in orders for hard disk drives (HDD) and camera components, ii) the fire that ravaged its Klang manufacturing plant on New Year’s Eve, and  iii)  the  implementation  of  minimum  wages  early  this  year.  The company declared a final dividend of 1 sen (FY12: 3 sen).
• Outlook.  Going forward, the outlook for the HDD and camera market is expected  to  be  lackluster.  HDD  giants  such  as  Western  Digital  and Seagate have guided  for  4QCY13 worldwide HDD shipments to be flat on  a  sequential  basis  (3QFY13:  139m  units),  whereas  camera  maker Nikon  has,  for  the  second  time  this  year,  revised  down  the  industry’s global  shipment  forecast  for  cameras  with  interchangeable  lens  (CIL) and related products by  4%  to 47.7m units from  49.5m  due to  softening demand.
• Forecasts  &  risks.  On  incorporating  Notion’s  actual  FY13  results,  we tweak  up  our FY14/FY15 forecasts by 0.5%.  The key risks to earnings are: i) a weaker-than-expected PC market, which will dampen  demand for  HDD;  ii)  waning  demand  for  CIL;  and  iii)  plans  to  venture  into  the robotics, O&G and aerospace industries not being rolled out.
• Valuation  &  recommendation.  Maintain  NEUTRAL  on  the  stock  as there  are  no  concrete  near  term  catalysts  to  prompt  an  upgrade.  The weak  outlook for HDDs  and camera does not bode well for Notion, as these  segments  make up 80-85%  of group  revenue. Hence, we  find the stock  fairly priced for now. Our FV is unchanged at MYR0.74, based on 8x CY14 EPS. This in line with the stock’s 7-year historical P/E.

Key Takeaways From Analyst Briefing 
Operating  highlights.  The  utilisation  rate  at  Notion’s  HDD/camera/auto  segments stood  at  70%/60%/80%  respectively.  In  the  HDD  space,  management  claims  that Notion  stands  to  benefit  from  the  enterprise  division  (given  the  general  need  for affordable bulk data storage devices) as there is pent-up demand for multi platter and anti-disks.  However, it said the outlook for  its  camera business is a  challenging one due to weak demand from end-consumers. However, things look more positive in the auto  segment,  where  Notion  has  roped  in  TRW  Automotive  as  one  of  its  clients. Lastly,  we  gather  that  its  planned  foray  into  the  robotics,  oil  &  gas  (O&G)  and aerospace businesses is currently facing some hiccups.

Management guidance.  Management  is guiding  for  revenue to grow to MYR240m (+7%  y-o-y)  in  FY14,  with  EBITDA  margin  of  about  30%.  As  for  the  bottomline, management expects net margin to come in at 10-15%.

Forecasts & risks.  Our forecasts are  generally in line with management’s  guidance but on incorporating Notion’s actual FY13 results, we tweak our FY14/FY15 forecasts slightly higher by 0.5%. The key risks to earnings are: i) a weaker-than-expected PC market, which will in turn curtail HDD  demand;  ii)  dwindling  demand for CIL;  and iii) new businesses in the robotics, O&G and aerospace industries not taking off.

Valuation  &  recommendation.  We  maintain  our  NEUTRAL  view  on  the  stock  as there are no concrete near-term catalysts to justify an  upgrade. The weak outlook for HDDs  and cameras  does not bode well for  Notion  as those two segments contribute 80-85% of total revenue. Hence, we think the counter is fairly priced for now. Our FV for  the stock  is unchanged at MYR0.74, based on 8x CY14 EPS,  in line with its  7-year historical P/E.

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Company Profile
Notion VTec is a leading precision engineering specialist and manufacturer of high precision components for the   HDD, digital camera, automotive, consumer electronics, and air-conditioning industries.

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Source: RHB