On the road to recovery - NOTION

by **Cals** Mon 19 Aug 2013, 10:22

On the road to recovery
Business & Markets 2013
Written by Hwang DBS Vickers Research
Monday, 19 August 2013 09:54

NOTION VTEC BHD []
(Aug 16, 84.5 sen)
Maintain buy at 81 sen with a target price of 90 sen (under review):Notion's net profit of RM40 million for the third quarter ended June 30 of FY13 (3QFY13) was 102% higher year-on-year (y-o-y) (more than 100% quarter-on-quarter [q-o-q]) mainly due to insurance receipts of RM35.8 million on loss of assets due to the fire at its Klang factory on Dec 31, 2012.

Stripping this out, core net income was RM7 million, 65% lower y-o-y due to lower orders from key clients, Western Digital and Nikon. On a positive note, q-o-q earnings are up by more than 100%, as there has been a recovery in the demand for interchangeable camera lenses (camera segment revenue improved 47%). But given that Nikon SLR and interchangeable lense shipments fell on a y-o-y basis, we are monitoring this development closely.

Gross margin was also higher at 21.9% against 16% in 2QFY13. However, slow personal computer sales and a seasonally soft quarter in Europe dampened hard disk drive (HDD) demand (Notion's HDD segment revenue increased by 5%). Core earnings for the first nine months of FY13 were below our estimates but in line with consensus.

The second half of 2013 calendar year (CY13) should see a pick-up in key segments on the back of seasonally higher demand and new product launches.

We think Notion is poised to recover as HDD demand ramps up, specifically in the capacity enterprise space (Western Digital should progressively roll out its helium sealed cloud storage HDDs in 2014). This is premised on rampant demand for data storage solutions in cloud as well as application processes.

In addition, the demand for interchangeable camera lens is expected to improve in the near term as Nikon ramps up newer products in its entry-level single lens reflex cameras.

New ventures in the consumer electronics, oil and gas, and robotics components would likely play a part in Notion's medium to long term growth outlook.

[You must be registered and logged in to see this image.]

We cut our forecast FY13 core earnings by 23% to incorporate lower HDD and industrial/auto contributions, as well as lower gross margins but maintain our price target, which is pegged to five times CY14F earnings per share. — Hwang DBS Vickers Research, Aug 16

This article first appeared in The Edge Financial Daily, on August 19, 2013.