Silver lining for Notion VTec

by **Cals** Sun 13 Oct 2013, 22:35

Published: Saturday October 12, 2013 MYT 12:00:00 AM
Updated: Saturday October 12, 2013 MYT 7:21:18 AM
Silver lining for Notion VTec
BY LIZ LEE
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Thoo: ‘We’re still in the process of acquiring the shares from Alcyone.’

LEADING precision engineering specialist and manufacturer of high-precision components, Notion VTec has gone into a deal it may have to work doubly hard on to prove its worth to investors.
With a sluggish outlook in the personal computer and cameras with interchangeable lenses (CIL) segments where Notion VTec operates, it has perhaps picked a less felicitous time to subscribe to a 19.9% stake in a loss-making silver mining company in Australia.
What puzzles investors is why pick a completely unrelated business to invest in? Especially since Notion VTec’s attempted ventures into the robotics, oil & gas and aerospace have not quite taken off.
However, executive chairman Thoo Chow Fah says its teaming up with Alcyone Resources Ltd not only stands to benefit from the latter’s turnaround plans, but also the unexplored opportunities of supplying refined silver to Asean.
He notes that silver has many industrial applications such as in the production of automobiles, mobile phones, electronics and solar panels.
Alcyone is listed on the Australian Stock Exchange. It mines in Australia’s only pure silver mine in Queensland, and sends its ore to the Perth Mint for refining and then sold at spot price to the mint for coin production.
Thoo believes Notion VTec can apply its business acumen and experience in running engineering businesses in metal conversion, machining, casting, surface treatment and metal working when collaborating with Alcyone.
To this, he says, it is still too soon to tell but both companies are interested to look where they can apply Notion VTec’s expertise in silver mining.
“Give us a few more weeks, we will see how and what we can work out. Right now, we’re still in the process of acquiring the shares from Alcyone,” he tellsStarBizWeek.
Notion VTec’s core business is in manufacturing high-precision components for hard disk drive (HDD), digital camera, automotive, consumer electronics and air-conditioning industries.
In the investor briefing on Tuesday, the company assured that its out-of-the-blue investment in Alcyone would not derail the company’s focus on manufacturing. Neither does the investment mean Notion VTec will cease its pursuits in the robotics, aerospace and oil & gas sectors.
Analysts, however, believe that the partnership with Alcyone shows little potential for synergy.
RHB Research Institute analyst Chan Jit Hoong says in his client report that the research house remains uncomfortable with the investment choice.
“We are cautious on Notion’s investment into an unrelated business in which management has no prior experience and limited opportunities for synergistic benefits. In addition, if Notion were to equity account for its 19.9% stake in Alcyone, it could prove negative for the company, given that the latter is still loss-making.”
Chan notes the key risks to Notion VTec’s earnings forecast include a weaker-than-expected PC market affecting demand for HDDs, further weakening demand for CILs, and the new businesses in robotics, oil & gas and aerospace industries not taking flight.
Thoo is unfazed by what the market is saying.
“I don’t really bother about what others say at this stage. If I didn’t believe in this investment opportunity, I wouldn’t have put my money down,” he says, reiteratingNotion VTec’s objective as an investment holding company constantly seeking good investments.
He emphasises that this investment is a reasonably low risk one, although it was not comparable to the other sectors Notion VTec has eyed. “We can’t compare it to the other things we are still pursuing but for a quick ramp up, this would be it.”
Notion VTec is interested in Alcyone as both an investment and business opportunity, he says, adding: “If it proves profitable, we may carve it out as another division. So those who want to invest only in the manufacturing company can do so and those who are interested in the mining business can put their money there separately.”
Thoo’s hopes for the Alcyone investment are in its potential as a subsidiary in the future.
“Alcyone has given us the option to up our stake to 29.9%. We could potentially make Alcyone into a subsidiary and then we can consolidate the revenue and bottomline of both companies,” he says. However, Thoo will only consider incorporating Alcyone into Notion VTec if or when the latter has enough control of the business.
Notion VTec will have a board member among the four in Alcyone. “Once we hit the 29.9% stake, we will look to put in another one or two more board members.”
On whether it would be easy to take over an Australian company, Thoo says the Financial Reporting Standards accounting framework, which both Notion VTec and Alcyone abide, allows for it.
“As long as we can show that we have sufficient control of the business, we do not need to have 50.1% stake to make Alcyone our subsidiary,” he says.
At 29.9%, Thoo says the projected profits from Alcyone will positively impact Notion VTec’s financial position.
Alcyone is projected to be profitable beginning January 2014. By 2015, it is projected to have strong cash surpluses.
At the current annual production rate of 1.28 million ounces of silver, the silver deposits within the mine are expected to last eight years. However, Alcyone says there are further known and inferred deposits in the areas peripheral to the mine, which would likely extend the mine’s lifespan by three more years at the same production rate.
The investment in Alcyone took up 47% of Notion VTec’s unaudited cash holdings as at June 30, 2013, before taking into account a RM24.7mil insurance claim received in September. The was no bank borrowings involved.
Amid these newsflow, Notion VTec closed unchanged at 78.5 sen yesterday. Since its announcement of the Alcyone investment on Oct 4, the share price has only moved up half a sen.
Notion VTec subscribed to a 19.9% stake in Australia-listed Alcyone for A$4.875mil (RM14.7mil) last week, making it a cornerstone strategic investor. It also has a six-month option to subscribe for interest-bearing promissory notes which allow itself to increase its stake in Alcyone by an additional 10% for A$2.5mil (RM7.5mil), subject to Alcyone’s shareholder approval.