April 16, 2010

NOTION - Maybank IB upbeat on Notion growing aspirations

Stock Name: NOTION
Company Name: NOTION VTEC BHD
Research House: MAYBANK

Notion VTEC Bhd
(April 15, RM3.35)
Maintain buy at RM3.29 with target price of RM4.20
: We stay buyers of Notion VTEC. Notion's FY10 to FY12 earnings will be explosive should it successfully capitalise on higher 2.5" HDD component orders from Samsung and Alphana.

Our projected three-year sales compound annual growth rate (CAGR) of 23% could jump to 61% if these prospects materialise. Valuations are low at single-digit forward price-earnings ratios (PERs) for a growth stock with high scalability prospects and an improving track record. Our target price pegs the stock to five times EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortisation) for FY11.

Samsung and Alphana Tech have indicated interest to double Notion's 2.5" HDD base plate, motor hub and stator assembly monthly orders, from one million pieces per annum now to seven million by end-2012. Channel checks also suggest that Semco, Samsung's sub-contractor has invited Notion to set up a manufacturing plant in Dongguan, China. We suspect Notion will also diversify its business beyond the HDD, camera and auto segments.

Should Samsung and Alphana's HDD orders materialise, Notion is expected to lease, with the option to purchase, a third manufacturing factory adjacent to its current plant in Klang with a 150,000 sq ft space.

New orders from Samsung and Alphana could elevate Notion's revenue by RM73 million to RM392 million per annum in FY10 to FY12 based on average selling price of US$1.60 to US$1.80, which implies an explosive three-year sales CAGR of 61%. We suspect plant expansion into Dongguan is unlikely as Notion's main priority is getting the third plant in Klang running.

These positives have not been incorporated into our forecasts. 2QFY10 results are expected to be released by April 29. Net profit performance should reflect 1Q's RM14 million, a positive considering that 2Q is seasonally the weakest. The strengthening of the ringgit has a negative effect on Notion. Sensitivity analysis suggests that every 5% variation in the US dollar would affect Notion's net profit by RM2 million. - Maybank IB, April 15


This article appeared in The Edge Financial Daily, April 16, 2010.

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