NOTION (FV RM2.41 - TRADING BUY) Corporate News Flash: Acquires a Spate of Assets

THE BUZZ

Notion announced that it has entered into a Sale and Purchase Agreement (SPA) with Dulon Industries SB to purchase a land with an industrial factory at Klang amounting to RM17.5m, where RM16.5m will be financed via debt and the outstanding amount will be satisfied by internally generated funds.  Separately, Notion also announced the acquisition of the remaining 10% equity interest in Kaiten Precision (M) SB from Mr Ee Meng Pin for RM1m.

OUR TAKE

Details of the property. The land being purchased has a freehold tenure with an area of 2.638ha in Klang, including buildings with a total build up area of 136,208 sq ft. The buildings are currently rented by Notion for its operations where Notion has to service a monthly rental payment of RM70k.

Income statement takes a hit. Even though the acquisition will lead to rental savings,the additional RM16.5m debt raised for buying the assets should lead to a net gearing  increase of 0.06x for FY12/FY13. In turn, FY12/FY13 core net profit is  poised to marginally decrease  1.0%/1.3% to RM46.7m/RM46.2m factoring in our conservative financing rate of 7%. However, management deems the purchase to be necessary as it is looking to expand and maintain Notion’s manufacturing operations on the same premises. Despite the short-term detriment to its income statement, we think that the purchase would be beneficial, especially in the long-run, with any future expansion in its business operations within a stone’s throw  away. This allows management to have better control and close administration of its facilities, which is coupled with the potential capital appreciation in land value.

Consolidating ownership of Kaiten.  Kaiten’s principal business activity is to design, develop and mass produce high-precision micro parts for the camera business segment as well as conduct  related research and development activities. We  consider the valuation paid for the remaining 10% equity interest in Kaiten  at 5x FY11 PER for the sum of RM1m as cheap, given that we peg Notion as a group at a higher earnings multiple of 8x. Even though there is no material monetary impact to its financial statements, Notion will now have full control of Kaiten, allowing the former to make further investments and potential asset  injections,  as well as  restructure the enlarged group with ease.

Maintain TRADING BUY at a revised FV of RM2.41.  All in all, we reiterate our TRADING BUY recommendation on Notion but with a revised fair value of RM2.41/share ascribed to 8x CY12 PER (previously RM2.43/share), given the higher interest expense arising from the RM16.5m debt raised. We continue to like the stock  following the inclusion of  three new Japanese HDD customers into its client base, which  would, in turn, boost its profitability and give it a diversified product mix.

Source: OSK188