Iconic Gloves: Only Time Will Tell

Last week in mid Jan22, Iconic officially launched its RM200mil gloves and face mask manufacturing facility in Batu Kawan.

This facility will house 12 double former gloves dipping lines (capacity 3.3bil per year) and 20 medical face mask production lines (capacity 220mil per year).

It has obtained CCC in early Nov21 and at the time of the official launch in Jan22, 6 nitrile gloves lines have already started running since Dec21.

The rest of the 6 gloves lines and 20 face mask lines are expected to start by Mac22.

Since the end of year 2020, share price of the 7 listed medical gloves companies in Malaysia dropped tremendously as their profits fell due to declining average selling price (ASP).

For new kids on the block who recently diversified into medical gloves manufacturing such as Iconic, their revenues (and probably profits) will grow as the contribution from gloves kicks in.

How will the market value the newcomers? Will their share price drop like the existing gloves counters, or rise due to increasing profit?

My Portfolio Jun20

Summary For June 2020

Jun-20
Numbers of stocks	14
Share Sold	Notion @ 0.705 (all)
Share Bought	JAKS @ 0.88
	JHM @ 1.33
	SCIB @ 2.06 (add)
Overall 2020
Portfolio Return Jun20	2.83%
KLCI Return Jun20	1.88%
Portfolio Return YTD20	-0.50%
KLCI Return YTD20	-5.53%

Portfolio @ End of June 2020

Stocks	Avg	May20	Jun20	Div20	Jun20%	Overall%
BJAUTO	1.92	1.25	1.48	4.2	18.4	-22.9
DAYA	0.035	0.005	0.010		100.0	-71.4
DKSH	2.50	2.83	2.49		-12.0	-0.4
GESHEN	0.43	0.44	0.43		-2.3	0.0
HIBISCUS	1.05	0.56	0.62		10.7	-41.4
JAKS	0.88		0.86			-2.3
JHM	1.33		1.34			0.8
KPOWER	2.03	1.98	2.30		16.2	13.6
KRONO	0.76	0.52	0.535		2.9	-29.6
LEONFB	0.505	0.315	0.310		-1.6	-38.6
MATRIX	1.42	1.70	1.81	6.00	6.5	27.5
PRLEXUS	1.15	0.65	0.54		-16.9	-53.0
SCIB	2.06	2.03	2.13		4.9	3.4
SCIENTEX	2.735	8.28	8.90		7.5	225.4

For June 2020 my portfolio achieved a modest gain of 2.8%. Year-to-date it's close to break even.

On 29th May, I bought  my first stock since February this year. I'd say it's quite late and there are a lot of opportunities missed.

My first purchase was KPower followed by SCIB on the same day. In early June, I increased my position in SCIB and added Jaks into my portfolio. Only in late June I decided to add JHM.

My confidence in current stock market was actually not that high, so I was thinking of whether I should invest short term "hit & run" style or mid to long term like I used to do.

I decided to choose the latter.

As mentioned in my previous articles about Jaks, I believe that Jaks's FY21 will be great. However, as this stock has bad "Qi" from its history, it might not go up to where everybody wants it to be in a short period of time.

Jaks, together with Datuk Abdul Karim's KPower & SCIB are all companies in construction sector, a sector which is not in positive trend like health-related and technology stocks. 

Nevertheless, they are not in negative trend either. It's just neutral. Upcoming 12th Malaysia Plan (2021-2025), along with Sarawak state election and possible snap GE15 might act as catalyst for construction sector.

There are many tech stocks that I wish to invest in, including MI, SAM, Frontken, JHM & Gtronic. Finally I selected JHM mainly because I feel that its business model and products have the potential to generate good growth going forward, even though its share price has already went up more than 10 times before.

5G and electric vehicles are the next big things. I read that JHM plays some parts in 5G modules and EV charging stations which attracts my attention. 

However, its automotive-related LED back light business might suffer in Q2. Hopefully it can get back on track after that. 

I have sold all Notion shares to lock in the profit after holding it for more than 4 years. While its FY20Q1 loss-making result was not a surprise to me, I was a bit disappointed that the management did not mention much about its "Stingray" & "Nixon" projects.

I still have plan to buy back Notion, mainly due to its original business expansion while the new face masks business will be a bonus if it's sustainable. The management has warned that April & May will be the worst but expected a recovery in June. With the face mask business supposedly starting in June, may be it can help to save FY20Q2 result.

Matrix still haven't announce its FY20Q4 (Jan-Mac20) quarterly result yet, after being granted a delay until 15th July. Its results will be negatively affected but I'd expect worse result for FY21Q1 (Apr-Jun20).

Even though property market has slowed down for years, Matrix still registers increasing revenue and profit throughout the years. Its unbilled sales still stay at RM1.2billion at the end of Dec 2019. At least shareholders can expect consistent dividends for the next 1-2 years.

If not for the sales of industrial lands and total 5 quarters due to a change in financial year end in FY16, Matrix is a rare company which shows annual increasing revenue and profit without fail since listed in 2013.

Now we are already in the second half of 2020. So far this year I disposed 6 stocks and added 5 stocks. There are too many stocks in my portfolio now.

I nearly add another stock in June, but I hold back the strong buying desire due to depleted cash level. I need cash to subscribe to Jaks rights issue!

Notion: Face Mask & Polypropylene Fabric Biz

Notion's 2:1 bonus issue just got ex-ed yesterday. With previous day's closing price of RM1.16, its opening price yesterday should be 77sen. It ended the day at 83.5sen (up 8.4%) even though its day high was 91.5sen.

After falling to 40sen in Mac20, Notion has miraculously crawled back to its pre-Covid price range of around RM1.20.

Recently we could see lots of so-called "Covid-19 related" stocks rocketed into the sky. The party is even joined by a hospital beds provider.

Is Notion one of those stocks?

Not long ago, Notion's chairman mentioned that the company is venturing into face mask production business.

This leaves lots of question marks to investors. What kind of face mask? What is the scale of the production? When will it start? How much sales does it expect?

Yesterday, Notion finally published the detail of its face mask business on its website.

According to the presentation, Notion will produce 3-ply & 4-ply face masks, and also polypropylene melt blown fabric used to produce face mask.

It has invested in 3 lines which can produce a maximum of 8 million of 3-ply face masks per month. This is expected to start operation in June.

It will also add one line to produce 4 million pieces of 4-ply face masks per month in August.

For the polypropylene melt blown fabric (PPMB), it has invested 2 machines which are able to produce 20 tons per month starting from June, and another 2 machines which are able to produce 25 tons per month from August.

So, Notion can produce 45 tons of PPMB from August, but the chairman said that Notion has orders of more than 100 tons per month from ready buyers in China!

As a result, Notion will develop its own PPMB machines in 3 months to produce another 100 tons per month.

The estimated sales of face masks (12mil/mth capacity) and PPMB (45 tons/mth capacity) are expected to be RM11.2mil and RM6.3mil respectively, per month at full capacity.

If this is true, it will potentially contribute RM17.5mil sales per month, or RM210mil per year! This does not even fulfill China's order of more than 100 tons PPMB per month.

Notion's FY19 (ended Sep19) total revenue was RM238mil. So this face mask business will almost double its previous revenue derived from HDD, camera, auto parts etc...

Gross margin is targeted to be 30-50%.

When it announced its FY20Q1 result in Feb20 before the Covid-19 fear, Notion gave a target sales of RM320mil for FY2020, mainly helped by the new EMS & aluminium extrusion business.

It's not easy to predict Notion's EPS since its recent quarterly financial results are affected by insurance claims and one-off items.

However, Notion's chairman did mention that its operating after tax profit for FY20Q1 was RM5.2mil from a revenue of RM70mil.

It will release its FY20Q2 (Jan-Mac20) result soon in early June. Of course its net profit will be much lower than the preceding quarter of RM14.2mil. 

Personally I hope its FY20Q2 net profit can be around RM5mil, which means an EPS of 1sen based on 504mil shares after bonus issue.

This figure is just a guess. If Q2 goes into red, I won't be surprise.

FY20Q3 is widely expected to be loss-making. Besides factory shut down, its existing business might be affected by cancelled or reduced orders from customers.

As the worldwide economy is gloomy in the near term, we are not sure how Notion's second half of calendar year 2020 will look like, but the venture into face masks business might come in time to keep the company busy and moving.

It does not need to rent a place as it just moved to its new and larger plant. It might not even need to hire more workers. 

Nevertheless, it might still suffer initial start up loss, who knows?

The demand for face masks is high now, but we don't expect this to last forever.

When the demand wanes, at least it has kept Notion afloat during the crisis, ONLY IF everything the management plans goes well.

You can read Notion's full presentation on its face mask venture here.

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.

Notion with Dyson?

I wonder how many of you notice that, a listed company's executive chairman made comments and answered questions in i3investor social forum!

That company is Notion Vtec, and it was around end of last year.

From the way he answered questions and his in-depth understanding of the company, I believe that he was no doubt an important figure in the company.

He painted a very rosy picture of Notion in the near future, with how many new & important customers secured recently, most notably Dyson.

Anyway, all his previous comments in i3investor have been removed.

What he said in the forum was almost like what was reported by The Edge earlier in Nov19 "Notion Vtec Ventures Into EMS Space".

Previously Notion was dependent on HDD & Camera parts, but now these 2 segments are expected to be stagnant & drop respectively.

The growth area is the automotive segment & the new EMS (Electronics Manufacturing Services) segment.

In its automotive segment, Notion mainly produces braking plungers for Electronic Braking System (EBS). It produces 30mil plungers annually which are fitted into one of every 6 new cars globally.

It was reported that Notion recently secured 3 new customers in this automotive segment, namely Delphi International, Hilite International & BorgWarner which should contribute to its FY2020.

For its EMS segment, it will supply metal parts to customers, not plastic parts like VS industry and SKP Resources.

Aluminium is the main raw material for Notion. So recent drop in aluminium price should benefit it.

As mentioned before, Dyson should be its main European customer in this EMS segment. Notion chairman even shared a link of Dyson's airblade 9kj hand dryer in the forum.

More interesting to investors, the management gave sales target for the next two financial years in its latest FY19Q4 quarterly report.

For the past 5 years, highest revenue achieved by Notion is RM275mil in FY2017, and FY2019's (ended Sep19) revenue stands at RM238mil.

For the upcoming FY2020, it has a target sales of RM320mil, and a whopping RM400mil for FY2021.

It also targets a PAT margin of between 7.5% to 9%. If we take a modest 8% PAT margin, PAT for FY2020 & FY2021 might be RM26mil & RM32mil respectively, with EPS 7.6sen & 9.5sen based on 336mil shares at the moment (before bonus issue).

If we give a PE ratio of 15x for a company with expected growth (currently VS 15x, SKP 20x), it will be RM1.14 & RM1.43 for the next 2 years. Current share price is at RM1.21.

Nevertheless, I think Notion still has great potential for further growth. According to its chairman, Notion has competitive edge compared to its peers, and potential customers are amazed with its new modern facility and quick response time.

As reported by The Edge, Notion has a target of achieving market capitalization of RM 1 billion by 2024. To achieve this, its share price has to be at RM3.00.

Anyway, target is just a projection or forecast. Investors need to be cautious that it might not hit its target.

Readers of this blog should be aware that I have Notion's shares. After the company started its automotive segment I have a feeling that more diversified customers might come in if it concentrates on its expertise, not doing things like selling handphones.

Recently Notion's share price has advanced more than I can hope for, probably due to its proposed 2:1 bonus issue. I think I will continue to hold and hope that its business will perform better that its forecast.

Notion Sets Record

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.

HDD Sees Light in Hybrid Ultrabook

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.

Notion: Encouraging Announcement

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.

Can Notion Avoid Loss?

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?

HDD Players Head-to-Head

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.

Notion FY11 Q3

 

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 is Coming...?

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.

Notion: From HDD to Camera

 

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.