Notion Vtec - Headwinds ahead for FY13

Management’s cautious guidance has reaffirmed our conviction that the company’s prospect going forward will be challenging in light of the prolonged external uncertainties that could exacerbate the lacklustre demand in its hard disk and camera segments. Taking a cue on that, we believe that the prospect for its FY13 top and bottom lines growth will remain challenging. We have slashed our FY13E revenue by 19% to factor in a lower revenue growth assumption given the softer demand in its main business segments, i.e. hard disk and camera. Consequently, our FY13E net profit has been lowered to RM49.3m from RM60.4m. In view of a challenging FY13, we have also lowered our targeted PER to 5.9x (-0.5 SD) from 7.5x (4-year average PER) previously, leading to a cut in our Notion target price to RM1.07 (from RM1.50 previously). Rating downgraded to a MARKET PERFORM.

A blessing in disguise for FY12. To recap, although the group suffered losses in 1Q12 during the Thai flood due to 1) the operation disruption in its Thai unit, 2) halted orders by its major customers and 3) the recognition of flood-related property damage losses, it still managed to record a robust growth of 30.4% YoY at the top line, thanks to the higher sales orders by major customers (who were restoring their inventories to pre-flood levels). As a result, the overall FY12 net profit still rose 3.4%. We understand that the Thai’s flood recovery period in 2Q12 and 3Q12 was thus a ‘watershed’ opportunity and in fact, the softer 4Q12 financial performance on a QoQ basis implied that its major customers had already fully recovered to their                 pre-flood inventory levels.

Strong headwinds in its HDD and Camera segments. Management believes that its two mainstay segments namely HDD and camera parts will be facing strong headwinds at least for 1HFY13 in light of the weaker consumer spending coupled with a lacklustre demand during the year-end seasonality period. Management also notes that the visibility of the HDD industry is murky (only 3 months) for now as the customers are adopting a wait-and-see approach in view of the frail economic conditions. For its camera segment, we understand that a weaker consumer spending as well as the anti-Japanese sentiments in China have affected the sales of Japanese goods and this could derail the group’s strong growth momentum in this segment in the near term.

The silver lining in the HDD segment. With the muted HDD sales having also been depressed by the switch in demand for tables and smartphones, which mainly use flash memory, management foresees that any light at the end of the tunnel could only happen in 2HFY13 as the HDD industry is now responding by developing 5mm thin base plates catering for the hybrid HDD, which is expected to give a strong fight in the Ultrabook segment. On top of that, management also notes that introduction of the Surface tablet by Microsoft could help to improve HDD sales.

Our take from the post-results analyst briefing. While we have great respect for Notion’s management ability to steer the company well, the prevailing economic uncertainty does not favour the industry as well as its business. To be conservative, we have slashed our FY13E revenue by 18.8% to factor in a lower revenue growth assumption given the softer demand in its main segments namely camera and hard disk. As a result, our FY13E net profit has also been lowered to RM49.3m from RM60.4m. We are also introducing our FY14-FY15 forecasts, where we expect the group’s net profit to be at RM53.0m and RM53.3m respectively.

Source: Kenanga