Notion’s share price had retraced by 45% in 2014 as it sank into losses. Although we believe the worst is likely over, we maintain  our NEUTRAL call and MYR0.45  TP  (2%  downside),  pending  more affirmative re-rating catalysts. While we expect its HDD division to show some improvement in  2015,  we  foresee  further  weakness  in  its  camera  segment  on  the proliferation of smartphones with improved cameras.

Hard disk drive (HDD)  to grow 7-10%.  Seagate Technology (STX US, NR)  announced  its  Dec  2014  quarterly  results  with  earnings  largely within  expectations.  By  the  same  token,  we  expect  Notion  VTec’s (Notion)  HDD division to perform better at 5-10% growth in FY15  (Sep), having registered sales of MYR84.6m (+7.1% YoY) in FY14. On a side note,  Microsoft’s  (MSFT  US,  NR)  Windows  10  will  reportedly  be launched  by  late  2015.  Early  technical  previews  have  thus  far  been positive. Should the new operating system prove to be well-received, we believe  this  could  potentially  help  revive  the  personal  computer  (PC)replacement cycle come 2016.

Camera  division should  remain weak. We reaffirm our bearish stance on  Notion’s  camera  component  segment,  which  registered  revenue  of MYR56.3m (-45.2% YoY) in FY14.  We foresee further weakness as the latest  smartphones  in  the  market  are  equipped  with  increasingly sophisticated  camera  modules.  Based  on  the  Camera  &  Imaging Products Association’s statistics, global shipments of digital cameras and interchangeable lens dropped 26.5% YoY for YTD Nov 2014.

Auto  segment  may  grow  10-15%.  We  are  forecasting  for  its industrial/auto  segment  to  grow  10-15%  per  annum.  This,  in  our  view,will be achieved via  the  expansion of offerings for its industrial parts andmanufacturing of electronic braking systems components.

Smartphone segment to kick off soon. Details on its proposed venture into the smartphone industry have been scanty. We gather from industry sources that Notion could be looking to carry its own smartphone brands. While we acknowledge that  there could potentially be a niche market for this,  especially  in  the  rural  areas,  we  believe  earnings  accretion  isunlikely to be significant.

Maintain NEUTRAL.  All in, we maintain our NEUTRAL stance with our TP unchanged  at MYR0.45,  based on  the average of its 8x FY15F  P/E and 0.6x FY15F P/NTA.

Source: RHB