Notion Vtec - Headwinds From HDD

We are cutting our FY12f/FY13f core earnings for Notion Vtec (Notion) by 16.4%/13.7% respectively, as we were previously over-optimistic about its three Japanese HDD customers. Key takeaways from a recent analyst briefing were: (i) management cut their FY12/FY13 internal revenue forecasts by 5.7%/14.2% respectively, (ii) Minebea reduced its 2.5” HDD baseplate orders, and (iii) Notion intends to delay its venture into Dongguan, China by a year. Ascribing to the same multiple of 6.4x CY13 PE, we derive a FV of RM1.30. Seeing little upside to its current share price, we downgrade the stock to NEUTRAL.

Reshuffling product mix. To recap, Notion hired an additional 1,000 workers in 2QFY12 to ramp up its 2.5” HDD baseplate production to meet Minebea’s demand (from < 2m pieces/month to 4m pieces/month). However, management shared, the latter’s orders were only approximately 1m pieces/month in 3QFY12. The cutback is worrisome, as we fear Minebea may cease its orders entirely, mimicking what Nidec and NHK Spring did in June. Meanwhile, the company has shifted its focus to 3.5” anti-disk production to compensate for the order shortfall. Its management sees strong growth for this product, which the company is currently producing 2m pieces/month.

Camera segment a star. Growth of Notion’s camera business segment looks intact as it heads into a seasonally strong 2H12. We saw encouraging numbers in 2QCY12, during which global shipments for cameras with interchangeable lenses (CIL) grew 25% q-o-q (+58% y-o-y) while interchangeable lenses (IL) shipments rose by 30% q-o-q (+34% y-o-y). Nikon, the company’s largest camera customer, also maintained its earlier guidance where it expects to see its own CIL/IL shipments to expand 48%/40% respectively in FY13 (FYE March). Hence, we think Notion will be able to chalk in similar or better revenue from its camera segment this quarter.

Expecting final dividend of 2.4 sen. The management reiterated its intention to pay out dividends of at least 20% of net profit. Thus, we expect another 2.4 sen as a final dividend, as the company has already paid one sen this quarter.

Downgrade to NEUTRAL, revised FV of RM1.30. We are cutting our FY12/FY13 core earnings forecasts by 16.4%/13.7% respectively, as we were previously over-optimistic about the inclusion of Notion’s three Japanese HDD customers. Ascribing to the same multiple of 6.4x against its lower CY13 EPS, we derive a FV of RM1.30. Seeing little upside to its current share price, we are downgrading the stock to a NEUTRAL recommendation.

Source: OSK