Period      3Q13/9M13

Actual vs.  Expectations   Notion Vtec reported 3Q13 net profit (NP) of RM40.1m, taking its 9M13 NP to RM19.8m (vs. 6M13 net loss of RM20.3m).

Excluding the exceptional gain of RM8.2m arising from additional gains from a fire insurance claim,  the 9M13 core NP of RM11.6m accounted for 82% and 58% of ours and the consensus full year estimates respectively. The main positive deviation was the higher than expected EBIT margin on the back of better operational efficiency. 

Dividends    No dividend was declared for the quarter under review.

Key Result Highlights    YoY, the 9M13 revenue declined by 26.3% amidst the ongoing slow HDD orders (-33.6% YoY) coupled with the high base effect in 9M12 (mainly boosted by the strong order recovery post the Thai flood disaster in 2QFY12). The group registered a lower core PAT of RM11.6m (-62.0% YoY) in tandem with the weaker revenue and higher cost of sales (83.0% of total revenue in FY13 compared to 78.3% in FY12)

  QoQ, the 3Q13 revenue increased by 22.4% on the recovery of orders from major customers and normalising operations in June with fire damaged factory section fully restored. At the core PAT level, the group registered a growth of >100% underpinned by a stronger revenue growth as well as the better operational efficiency on higher capacity utilisation of c.75% (compared to mid 60% in 2QFY13). 

Outlook    The HDD segment of the group (estimated to contribute c.36% to the group revenue in FY13) could continue to drag total revenue growth amidst dwindling PC demand.  Nevertheless, we believe that the group’s move to diversify into components for the oil & gas, aerospace, robotics, and consumer electronics (predominantly in tablets) should cushion off the impact thus reducing its reliance on declining HDD demand.

We are turning more sanguine as the group (i) has finally been fully compensated and recover from the fire damages; and (ii) started to see sales orders recovery in its camera and ndustrial/automotive segments.   

Change to Forecasts   Post results, we have increased our FY13E-FY14E earnings estimates by c.RM4m and c.RM1m to RM18.4m and RM36.3m respectively after taking into account higher EBIT margin of 11.9% in FY13 and 18.7% in FY14 (from 9.2% and 18.1%, previously) on the back of higher operating efficiency. 

Rating   Upgrade to OUTPERFORM 

Valuation     Our TP has been raised to RM0.98 (from RM0.77), which is based on a higher targeted PER of 7.5x (from 5.8x previously, up by 0.5 notch from -1.0SD to -0.5SD below the 4-year forward PER as we are turning more sanguine on the group’s outlook as mentioned above.)

Risks    Higher labour cost arising from the implementation of the minimum wage policy.

Adverse forex fluctuations.

Sluggish PC and electronics demand.

Source: Kenanga