Notion Vtec has released its 2012 Q3 financial result. Its revenue rises
57% YoY or 13% QoQ to RM95.8 million, while net profit surges 96% YoY
or 28.8% QoQ to RM19.8 miilion. Both represent a new record high for
Notion.
Notion will give out interim tax-exempt dividend of 1sen, ex on 3rd Sep 2012.
| Rm mil |
Revenue |
Net profit |
| 2011 Q1 |
60 |
13.4 |
| Q2 |
54 |
10.8 |
| Q3 |
61 |
10.1 |
| Q4 |
62 |
12.5 |
| 2012 Q1 |
40 |
-4.8 |
| Q2 |
85 |
15.5 |
| Q3 |
96 |
19.8 |
The rise in revenue and profit are mainly contributed by more business.
After the Thai flood and Japan Tsunami, Notion's business seems to get
better. It secures new customers for hard disc drive due to shortage of
supply worldwide. It gets more jobs from Nikon after the camera
manufacturer's factory in Japan was seriously affected by Tsunami.
In the next quarter of Q4, it is expected that its Thai plant will
resume full operation and its Ijuk aluminum recovery plant will commence
operation. Its venture in China will also scheduled to start in Q2 of
2013 (Jan-Mac 2013).
There is a very real concern that whether hard disc drive business will
sustain in the near future, given the popularity of tablet computer such
as ipad, samsung galaxy etc. The emergence of ultrabook may have given
some room for HDD industry to breathe but how long can it sustain?
Notion has successfully spread the risk by increasing its camera parts
manufacturing business, thus it will not be affected to drastically by a
fall in HDD industry.
Notion's future looks promising. It can be a good stock to hold long term until something in the industry or management change.
Hard disc drive (HDD) has a hard time
competing with solid state drive (SSD) as a computer storage device,
especially with the increasing popularity of tablets such as ipad and
galaxy tab over notebook. Everyone is expecting the HDD industry to
suffer permanently.
SSD, which is quiet, lighter,
faster and has higher performance than HDD, has a major problem:
expensive. SSD is priced more than 10x more expensive than HDD per GB.
However, with the emergence of Ultrabook by Intel, HDD is expected to
breath again.
Ultrabook will put traditional
notebook into history. It is much lighter, thinner, faster with longer
battery life. It has some crucial advantage over tablet in which in
tablet there is no real keyboard and sometimes cannot perform this and
cannot support that.
Ultrabook: strongly pushed by Intel
Ultrabook which starts to hit
the market in 2011, initially use mostly 128GB SSD. However, to increase
the storage capacity to 500GB-1TB without increasing its cost much, a
hybrid storage solution is introduced. In this hybrid of external cache
SSD+HDD, a small capacity of cache SSD is incorporated with a large
capacity of HDD to increase the overall storage capacity without
affecting the speedy SSD performance much. Another technology called
hybrid HDD is another different thing under development by Seagate in
which the cache SSD is incorporated internally into a HDD.
Some analysts predict that
ultrabook with hybrid storage will explode into the market in year 2012.
Thus, hybrid storage and HDD demand will get a major boost as well.
Figures for HDD in Ultrabook ONLY
Ultrabook share in notebook
Notebook share in overall mobile PC
Personally I don't fancy things like ipad, galaxy tab, iphone etc. I
don't even own any of those gadgets. I don't think ultrabook will be as
popular as the ipad. However, ultrabook will certainly make more people
to reconsider the forgotten "notebook". If the forecast of ultrabook
demand is right, then HDD industry will surely make its comeback
strongly, starting from year 2012.
Further to the
announcements made on 11 October 2011 and 23 November 2011, the Board of
Directors of the Company wishes to update on the impact to the Group
arising from the floods on the operations of Notion Thailand Co. Ltd
(“Notion Thailand”) as follows:-
1)
Following the dry out by end November 2011, Notion Thailand’s factory
located in Ayutthaya had to be cleaned out and all affected stock and
inventory were recovered. Work-in-Progress and finished goods were sent
back to the Group’s factory located in Klang for cleaning and recovery.
2) Electrical, telecommunication and water supply were fully restored soon after the drying out.
3) The process of insurance claim is still on-going and only expected to be completed by March 2012.
4)
Notion Thailand will now recommence operations of anodising and
sub-assembly of lens before June 2012 but all support for the
Single-lens Reflex (“SLR”) camera segment will be from the main Klang
factory. As a result, the financial impact of the loss of revenue to the
Group arising from our affected Thai factory will be minimal as Notion
Thailand contributed less than 3% to the Group’s revenue.
5) The Group’s business outlook has turned for the better with a strong recovery in January 2012 sales to much higher than pre-flood level.
The trend is expected to be upwards for the remainder of the financial
year ending 30 September 2012 (“FY2012”) and beyond as the Hard Disk
Drive (“HDD”) segment is expected to be in short supply until mid 2013
due to backlog of orders. The average selling price of HDD is expected
to remain above pre-flood level for multi-quarters ahead.
6) One of our major HDD customers is reportedly estimating full pre-flood operations by September quarter 2012.
7) With the entrance of 3 new Japanese major customers in the HDD segment and the ramp up in HDD component sales, we expect FY2012’s revenue to grow in strong double digit over FY2011. The sustainability of this new business is expected to be good as the customers’ commitment is assumed to be long term.
8)
Meanwhile we expect robust camera orders in February 2012 onwards as
the camera segment is expected to be on route to full pre-flood
operations by March 2012 while the Auto/Industrial segment remains
stable.
The
above is internal management’s estimation and is not a forecast or
projection and has not been reviewed by our external auditors.
This announcement is dated 10 February 2012.
----*----
From
this announcement, though the upcoming financial result of 2012Q1
remain tricky, investors can expect a far better result in Q2
contributed by higher revenue, higher margin and insurance
compensation.
With
its strong & honest management team, I think Notion Vtec is worth
to consider in mid to long term investment, even though the future of
HDD is still a concern.
In its presentation for 2011Q4
financial results in Nov 2011, Notion warns that it may register a
loss-making quarter in 2012Q1 (Oct-Dec 2011). This includes RM3million
loss for damaged finished products, RM2million loss for inadequate
insurance cover on machinery, and expected 45% drop in revenue for
2012Q1 due to the Thai flood.
Global major HDD manufacturers
are badly hit by the flood. Most of them have factories in Thailand
which produces about 60% of HDD in the world. Notion's factory in
Thailand was closed down because of the flood. However, the plant mainly
produce camera parts and it makes up only 3% of Notion's revenue.
Notion mentioned in Nov that the forecast of reduction in revenue is
mainly due to reduction in orders by its main HDD customers such as
Western Digital and Seagate, whose production have ceased due to the
flood.
Flood in Ayutthaya, Thailand
Reduction in order by WD &
Seagate should affect JCY as well. Though JCY's factory in Thailand is
not affected by the flood, but if there is no order from customers, it
is still useless even if the factory is in good shape. However, it turns
out to be the other way round.
Since mid October, JCY share
price starts its rally after reports saying that it will benefit from
the Thai flood. Besides the fact that JCY's Thai factory is not
affected, the price of HDD has increased by 50-100% due to shortage of
supply. Some source mentions that JCY receives a lot more orders esp
from Western Digital. JCY's share price has gained almost 200% since Oct
2011.
Western Digital is also Notion's
major customer. Why no one mention about Notion? Western Digital does
not order from Notion because of logistic issue?
Yesterday, (4th Jan 2012), JCY
releases its profit guidance for its 2012Q1 (Oct-Dec 2011). It expects
its net profit to surge 1900% YoY to the region of RM120million, which
will be 50% more than its previous record quarterly net profit. The
reasons given are increase in average selling price, stronger USD vs
MYR, effective product mix and efficient cost management.
Notion's discouraging
presentation was back in November 2011. Has anything changed their
forecast in December 2011? As in JCY's case, Notion should be able to
benefit from increased selling price of HDD and stronger USD, and
perhaps increased order recently???
Notion in Klang
In the previous quarter, Notion
has successfully acquired 3 new customers, at least to partly compensate
the anticipated lower orders by existing customers. Its facility in
Thai is expected to restart by Feb 2012. However, its camera parts main
customer Nikon is also affected by the flood.
It's hard to predict how Notion
will perform in the period of Oct-Dec 2011. Will it plunged into red
because of those one-off losses, or will the damage be offset by higher
selling price and demand for HDD?
Eng, JCY and Notion all have released their latest financial results this month. Lets see all of them in a glance.
| Rev (Profit) RM mil | Current quarter | QoQ | YoY |
| Eng | 133 (5.6) | 120 (4.8) | 135 (12.6) |
| JCY | 395 (-31.8) | 397 (12.4) | 481 (55.6) |
| Notion | 61 (10.1) | 54 (10.8) | 61 (2.9) |
Obviously JCY is the worst
performer. Eng and Notion are able to hang on with their revenue. Even
though Notion get the least revenue, but its profit margin is quite
impressive with the greatest net profit.
Eng has the smallest amount of
outstanding shares (122.5 mil), followed closely by Notion but JCY has
almost 16x more. For FY2010, EPS of Eng is the greatest with 40sen with
Notion 25sen and JCY 8.6sen. However, this is going to change in the
current FY11 in which we will see Notion top the rank. Eng may be then
be privatized if the takeover is successful.
Just
a couple of weeks after Notion announced that it is still in talk of a
possible stake sales, now seems like the talk has already collapsed!
Notion just announced its 3rd
quarter 2011 results. There is no major surprise. However, it's good
that it is on track to register a record revenue and net profit year,
after breaking those records every year since listed in 2005.
In 2011Q3, Notion's revenue
rises steadily, the net profit though increases 240% YoY, but reduces 6%
QoQ. As an 80% importer mostly done in USD, the weakening of USD has a
significant impact on Notion. However, the impact is slightly offset by
its USD hedging at RM31.2-3.22.
| RM mil | Revenue | Net Profit |
| 2006 | 90 | 24 |
| 2007 | 105 | 26 |
| 2008 | 146 | 33 |
| 2009 | 173 | 36 |
| 2010 | 227 | 37 |
| 3Q2011 | 175 | 34 |
Bear in mind that Notion is
primarily a hard disc drive (HDD) component manufacturer. While other
counterparts in Malaysia such as JCY, Dufu and Eng suffers significant
reduction in revenue and profit since the beginning of this year, Notion
is able to sail through it convincingly, thanks to its shift from HDD
to camera/auto segment (detail in previous post).
Notion announces recently that
it has secured a new 4+3 years contract from TRW Automotive to
manufacture parts for hydraulic braking system. This will contribute
about RM20mil revenue in FY2012 with estimated margin of 15%. This is
not bad as this single contract in Notion's smallest automotive segment
already contribute ~10% of 2010's revenue. Moreover, the new aluminum
ingot plant is starting to generate a new source of income.
TRW: One of the largest automobile safety products provider
The management of Notion still
remain cautious regarding future earning due to economy concern in the
US and Europe. Its guided revenue for the final quarter 2011 is
RM60-65mil.
Below is the latest analyst report by Maybank IB.
Notion VTec Bhd
(Aug 12, RM1.97)
Maintain buy at RM1.95 with target price of RM2.40: 9MFY11 net
profit of RM34 million (+17% year-on-year) made up 71% and 76% of ours
and consensus full-year forecasts. We maintain our “buy” call as
valuation is inexpensive at 4.1 times CY12 PER, backed by a solid growth
trend (38% two-year net profit CAGR). Our RM2.40 target price pegs
Notion on 4.5 times FY11 EV/Ebitda, reflecting regional peers’
(ex-Japan) valuations. Our target price also indicates an undemanding
forward PER of 5.1 times, significantly below the eight times average
for our small-cap universe.
Despite a seasonally soft
quarter, Notion reported stronger revenue of RM61 million (+13%
quarter-on-quarter) owing to growth from all segments, especially camera
(+20% q-o-q). Growth in camera sales was underpinned by lens body
mount and lens sub-assembly works for Nikon, which commenced in April
this year. Product mix continued to be skewed towards the camera
segment, accounting for 48% of total revenue, while HDD and auto
account for 36% and 16%, respectively.
Net profit of RM10 million was,
however, down 6% q-o-q, primarily due to higher tax rate of 23% (+12
percentage points q-o-q). Pretax profit rose 9% q-o-q despite a slight
contraction in earnings before interest, tax, depreciation and
amortisation (Ebitda) margin by 1.8 percentage points on higher costs
(i.e. labour, packaging, transport) and the weaker US dollar.
Additionally, Notion reported a RM2 million derivative gain on its
hedge contract in 3Q (2Q: RM3 million).
We understand that the company
is in the midst of securing new customers/orders: Nidec (2.5” HDD
baseplate), Axix (camera), TRW (auto) and Continental (auto). However,
we also caution that there may be a pullback in orders due to the
global recession outlook. We maintain our 38% two-year net profit CAGR
forecasts for now, pending an analysts’ briefing. — Maybank IB Research, Aug 12
Decent EPS and ROE. The forecast is rather optimistic here.
Notion Latest Target Price
| Aug 2011 | Target Price |
| Maybank | 2.40 |
| ECM | 2.43 |
| OSK | 2.25 |
Notion VTec announced on 1st Aug 2011
that the negotiation with various parties to acquire its business/equity
interest are still on-going. The Edge online put Notion as a stock to
watch on 2nd Aug, but only a mere 131,000 shares changed hands. Notion's
share price down 2sen to RM2.02. Seems like no one is interested.
Earlier in April this year,
Notion did announce that it is in talk with certain parties for its
stake. It was believed that a US base private equity firm is eyeing its
shares or Nikon may consider to up its stake. However, nothing
materialized and Notion finally announced in 1st July 2011 that the
negotiation has been terminated due to disagreement in certain terms and
conditions.
After exactly one month, Notion
announces that the talk is re-ignited, not sure with the same parties or
not. Almost on the same time, Notion's largest shareholder Choo Wing
Hong who has 13.27% of Notion's shares, disposed 431,000 shares and
256,000 warrants. Is there anything to do with the equity interest talk?
I don't know, but the amount of shares is quite small. I can't remember
when is the last time Notion's major shareholders dispose their shares.
Last month TYK Capital has
offered to acquire the entire business and privatize Eng Teknologi, also
a HDD player. With the survival of PCs in doubt, HDD players share
price have been vastly under-rated, which provides a good opportunity
for merger or acquisition.
Is Notion a good short term buy or even long term investment? The industry is risky but the management seems good.
Anyway, the dead line for Eng takeover offer is 5th Aug 5pm. Let's see how it goes.
Read this news yesterday: Nikon Malaysia aims to increase its revenue by over 40% this year.
Nikon's market share for DSLR
cameras and compact digital cameras stands at 49% and 16% respectively.
It sells more DSLR cameras than any other brands in Malaysia, and DSLR
camera is getting more and more popular.
From this news, straight away my focus is shifted to Notion Vtec. Nikon has 9% share in Notion Vtec since January 2010.
Notion Vtec supplies parts for
2.5-inch hard disc drive (HDD), digital camera and automobile/industrial
segment. Those who follow its share movement will know that Notion has a
very hard time indeed for the past 1-2 years. Its share price tumbled
from a high of RM3.50 in January 2010 to a low of RM1.50, with a drop of
almost 60%. Currently it is trading at slightly above RM2.00. Is it a
good company? Is it a bargain?
Lets look at Notion's net profit for the past few quarters.
| PAT RM mil | Q1 | Q2 | Q3 | Q4 |
| 2009 | 7 | 5 | 11 | 13 |
| 2010 | 14 | 12 | 3 | 8 |
| 2011 | 13 | 11 |
|
|
Notion's net profit fell from RM12mil in 2010Q2 to RM3mil in 2010Q3. However, we can see a speedy recovery afterwards.
Now lets see Notion's yearly financial performance.
| RM mil | Revenue | Net Profit |
| 2006 | 90 | 24 |
| 2007 | 105 | 26 |
| 2008 | 146 | 33 |
| 2009 | 173 | 36 |
| 2010 | 227 | 37 |
The revenue and net profit increase steadily since 2006, even with low-earning quarters in 2010.
What were the problems Notion actually face in year 2010? There are a few that seriously challenge the management team.
The main challenges are: weak
USD, sluggish HDD market due to the popularity of ipad/tablet and higher
than expected start up cost for its new production lines. The massive
drop in 2010Q3's profit is because of some quality problem in its
products which were rejected. However, this technical issue was promptly
solved. Currently Notion still face unfavorable situation in USD and
HDD market. However, good news started to flow in in 2011.
Seeing the unpredictable future
of HDD, Notion successfully shifted its main business from HDD to camera
segment. In year end 2010, HDD and camera contribution is tied at 44%.
After Q2 2011, HDD and camera segment contribute 38% and 45%
respectively to its revenue.
In early 2011, Notion secured a
new camera sub-assembly job from Nikon. According to a research report
from ECM Libra , Notion Vtec would initially start to produce 5,000
pieces per month in April, which would gradually be ramped up to 30,000
pieces per month from October onwards. The research house stated that
on a full-year basis, this job was estimated to enhance financial year
2012 revenue and net profits by RM111 million and RM10 million
respectively.
There were opportunities for
Notion to garner more sub-assembly jobs from Nikon in the future, as
30,000 pieces per month represented only 10 per cent of the total
sub-assembly jobs done by Nikon’s Thailand plant currently, which could
be outsourced to Notion Vtec eventually.
Then after Japan's Sendai's
earthquake in March 2011, Nikon terminated its production facilities
there. A week later, Nikon announced that it will move its body mount
production to Notion in Klang with immediate effect. This could generate
a revenue of RM36-60mil a year for Notion.
Besides, Notion set up an
aluminium scrap plant in Ijok, Kuala Selangor for the purpose of
smelting aluminium scrap into aluminium ingots for own use as well as
for sales to other customers. It could generate revenue and profit of
RM25mil and RM3.7mil per year respectively. The operation should have
started in May this year. Notion is also expanding its Thai plant and
expecting more revenue from it later.
For HDD segment, orders from
Samsung of late had surprised on the upside with 900,000 pieces per
month (p.m) of 2.5-inch base plates to commence by April this year from
the initial production of 250,000 pieces p.m.
Notion is currently applying for MSC status company. If successful, it can save RM8-10mil of tax for up to 5 years.
Notion does not only supply camera parts to Nikon, but also to Canon and Sony as well.
Notion's Target Price 2011
| Target price |
| ECMLibra | 2.50 |
| Maybank | 2.40 |
| OSK | 2.12 |
| HWANGDBS | 2.50 |
| RHB | 2.17 |
It is a risk to invest in a
HDD-related company at the moment. However, Notion's management is
confident that it can achieve yet another record year in 2011, with the
target revenue set at RM280mil. The half year revenue so far stands at
RM114mil. Though not even half of the target, I think this target is
still achievable, base on all the positive news above.
