Tuesday, 3 March 2020

Notion: On Hyper Growth Phase

"Hyper Growth Phase" is according to its chairman, not me.

For its latest FY20Q1 (Oct19-Dec19), Notion achieved its highest quarterly revenue since 2012 at RM70.3mil with a net profit of RM14.2mil. 

In the next 2 trading days after the release of this financial result, its share price fell 20% from RM1.24 to RM0.99.

Those who follow Notion for a while and study its financial report carefully should be aware that for the last 2 quarters & FY2018, its financial results have been "beautified" by insurance claims and one-off item.

So it's not surprise for the share price to fall especially when it coincided with extremely bad market sentiment that day.

Without those special gains, Notion's bottom line should hover around slight profit and loss in the last few quarters.

Nevertheless, investors buy Notion's shares because of its bright-looking future, as explained by its chairman.

888next Q1 results PAT RM14.2 mil can be broken down into:

1) Insurance BIL claim RM9 mil after tax

2) Operations RM5.2 mil after tax

We still picked up relocation costs in Oct and Nov. The EMS could be better.

Project Nixon (EMS codename) we need 600k pieces of aluminium tubing for vacuum cleaners worth RM4.5 mil sales per month from June 2020 onwards. We need RM6 mil capex to build anodising line and extrusion lines.

Many other projects coming onstreamline in H2.

Project Stingray (Extrusion solutions codename) is a major expansion of the extrusion business from 200 tons per month capacity to 1000 tons capacity and billet furnace for upstream recovery of aluminium leftovers. Mainly for external customers.
We expect RM10 to 12 mil per month sales contribution from Stingray in FY2021.

We are transforming the group into an aluminium total solutions company more than precision machining or fabrication but complete integration in 3 years time.

If you are a short term term investor then you may be missing out on the longer longer term prospects.

But always caveat emptor ie do your own analysis and risk assessment.

Notion is on a hyper growth phase. But the global markets look unsteady so be careful.

From its FY20Q1 report, it shows that current quarter's BIL insurance claim is RM12.2mil before tax. So it looks like actually the claim only contributes RM9mil from RM14.2mil of after tax profit.

I think the RM5.2mil operating net profit is not bad at all at this stage. If it can perform similarly for the whole year, then it can achieve RM20mil PAT for FY2020, or EPS of 6sen.

This is supposedly still without all those "new projects" kicking in.

Another encouraging part is the 56% growth in revenue of its EMS segment which is expected to grow much further in the second half (H2) 

"As the demand of metal parts for the EMS appliances sector continue to grow rapidly over the next year, it will be the mainstay growth driver for FY2020 and even FY2021. As the group delivers in volume and quality, our EMS customer is supportive of localisation of parts and conversion of plastics to metal parts and new models development augurs well for this space."  FY20Q1 quarterly report

Conversion of plastic to metal parts sounds interesting.

Anyway, since Notion management mentioned that H2 will be strong, I'll assume that its FY20Q2 result and even FY20Q3 will not be that spectacular. Of course Q2 will be much lower compared to Q1 without the insurance claim, but I don't expect loss unless it is significantly affected by Covid19.

At RM1, Notion's share price is not considered very low at the moment. So readers must study the risk and reward properly before investing in it.

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