Notion Vtec - Constant growth

We attended Notion’s briefing recently and came back with a firm view that ASP is sustainable due to backlog order coupled with new orders as well as the consolidation of five big players to three big players in HDD industry. The management guided that its outlook for 3Q12 would be better than 2Q12, with a stable PAT margin at 18% - 22% and the revenue remains strong at RM100m level as its sales is going to record RM33m in May, which is equally strong as Apr’s turnover. For the full year, we forecast sales to grow 34% to RM317.5m compared to RM287.3m in our previous forecast due to higher sales volume. Meanwhile, we have trimmed its PAT to RM45.3m in FY12 as compared to our previous estimation of RM52.3m due to higher operating expenses. Despite lowering net profit, we have raised our target price from RM1.35 to RM1.60 after rolled over our base year to FY13 and unchanged target average PER of 7.5x, which offer an upside of 39% to the stock. Hence, OUTPERFORM rating maintained.

Better 3Q12  as compared to 2Q, according to the management. QoQ, sales will grow double digit (18%) in 3Q, which is in line with its key customers’ expectation. One of its major customers’ in HDD (i.e.Western Digital) expects its sales to grow in double digit (40%) in next quarter while Nikon (Notion’s key customer in camera segment) expect its sales to grow by 12% for Apr-Sep CY12. Meanwhile,  management also guided that its 3Q12’s PAT margin will maintain at 18%-22% in 3Q12 underpinned by backlog orders and new orders from its three new customers as well as the recovery  of  Nikon’s  production  in  Thailand.  For  YoY,  we  expect  its  sales  to increase by 34% to RM318m in FY12 due to higher sales volume in total. 

Labour and space constraint. CNC machines and space to meet renewed purchase orders are the current challenges facing by Notion. To meet higher demand from its customers,  Notion will recruit additional 1000 foreign workers in 3Q12. However, the workers are only coming batch by batch monthly. Hence, we conservatively forecast the sales will grow only by 12% QoQ as opposed management 18% QoQ growth in 3Q12. 

Trimmed FY12-FY13 earnings forecast by 13% and 4% but raised target price of RM1.60. Post 2Q12 result update, we have lowered our FY12-FY13 forecast by 13% and 4% to RM45.3m and RM63.5m after finetuning and imputed labour cost for additional workers. Despite lowering our earnings forecast, we have raised our Notion target price to RM1.60 from RM1.35 after rolling over our base year to FY13.  We also revised our FY12 DPS forecast lower to 3.0 sen (from 3.5sen previously), translating into a dividend yield 2.6%.  

2012 outlook. The main drivers for the group’s earnings in 2012 are stable ASP and increased sales underpinned by higher demand from PC and laptops as well as digital camera. According to IDC, hard disk drive unit volume will grow 10% p.a. from 2011 to 2016 due to increasing connectivity, mobility and the cloud to store media, implied a tremendous growth opportunity for the big three players (i.e. Western Digital) in the industry. Notion being the supplier of Western Digital stands a great chance to benefit from this increasing volume trend. 

Source: Kenanga