Notion VTec - Fire incident at Selangor main plant

News    According to the Bursa announcement, a fire occurred on 31 December 2012 at a rear building of Notion's main manufacturing plant in Klang, Selangor. The incident affected both the whollyowned subsidiaries of the company, Kaiten Precision(M) Sdn Bhd ("KPSB") and Notion Venture Sdn Bhd ("NVSB"). 

 The number of computer numerical control (“CNC”) machines lost was about 100 CNC machines out of the group’s inventory of 1,500 CNC machines. Meanwhile, the affected area was 21,000 sq ft out of the main plant’s built-up area of 400,000 sq ft.   There was also a substantial damage of goods of KPSB and NVSB that needs to be ascertained. These assets (i.e. CNC machines and goods) are however adequately covered by insurance according to the announcement.

Comments   We gather from the management that there is a temporary loss of 90% capacity for KPSB and some disruptions to certain operations of NVSB (Plant 1), which is involved the washing of parts, visual inspection, lapping operations as well as wastewater treatment. 

 Management estimates that the loss of KPSB's capacity, which contributes ~10% of the group's full year revenue, will take up to four months to recover and the disruption of operations in NVSB (Plant 1), which contributes 60% of group sales, will take up to a month to recover. 

 All in all, KPSB and NVSB (Plant 1) contribute 63% of the group’s total revenue based on management’s guidance. Management also guided that the operation will be affected by ~4 months inKPSB and 1 month in NVSB (Plant 1). 

Outlook   The visibility for the semiconductor industry is murky for now as we gather that industry players are adopting a wait-and-see approach in light of the global economic uncertainties. 

 This has reinforced our view that the earnings prospects for tech companies will remain bleak in the medium term.

Forecast   Our back-of-the-envelope calculation which had factored in the preliminary guidance and potential gestation period has led us to slash our FY13E total revenue in HDD and camera segment by 2% and 8% respectively. As a result, our FY13E earnings estimate has been lowered by 9% to RM44.7m (from RM49.3m). Our FY14 earnings estimate however remained unchanged at RM53.0m.

Rating   Maintain MARKET PERFORM

Valuation    Our TP has been lowered to RM0.78 (from RM1.07), pegging the valuation at a lower targeted PER of 4.7x (representing a -1.0 SD).

Risks   Greater losses from the fire incident.

 Adverse currency translation.

 Sluggish electronics demand.

Source: Kenanga