NOTION (FV RM2.41 - TRADING BUY) Corporate News Flash: Acquires a Spate of Assets

Stock Name: NOTION
Company Name: NOTION VTEC BHD

Research House: OSK

Price Call: TRADING BUY

Target Price: 2.41

THE BUZZ

Notion announced that it has entered into a Sale andPurchase Agreement (SPA) with Dulon Industries SB to purchase a land with anindustrial factory at Klang amounting to RM17.5m, where RM16.5m will befinanced via debt and the outstanding amount will be satisfied by internallygenerated funds.  Separately, Notion alsoannounced the acquisition of the remaining 10% equity interest in KaitenPrecision (M) SB from Mr Ee Meng Pin for RM1m.

OUR TAKE

Details of the property. The land being purchased has afreehold tenure with an area of 2.638ha in Klang, including buildings with atotal build up area of 136,208 sq ft. The buildings are currently rented byNotion for its operations where Notion has to service a monthly rental paymentof RM70k.

Income statementtakes a hit. Even though the acquisition will lead to rental savings,theadditional RM16.5m debt raised for buying the assets should lead to a netgearing  increase of 0.06x for FY12/FY13.In turn, FY12/FY13 core net profit is poised to marginally decrease 1.0%/1.3% to RM46.7m/RM46.2m factoring in our conservative financing rateof 7%. However, management deems the purchase to be necessary as it is lookingto expand and maintain Notion's manufacturing operations on the same premises.Despite the short-term detriment to its income statement, we think that the purchasewould be beneficial, especially in the long-run, with any future expansion inits business operations within a stone's throw away. This allows management to have better control and closeadministration of its facilities, which is coupled with the potential capitalappreciation in land value.

Consolidatingownership of Kaiten.  Kaiten'sprincipal business activity is to design, develop and mass producehigh-precision micro parts for the camera business segment as well asconduct  related research and developmentactivities. We  consider the valuationpaid for the remaining 10% equity interest in Kaiten  at 5x FY11 PER for the sum of RM1m as cheap,given that we peg Notion as a group at a higher earnings multiple of 8x. Eventhough there is no material monetary impact to its financial statements, Notionwill now have full control of Kaiten, allowing the former to make furtherinvestments and potential asset injections,  as well as  restructure the enlarged group with ease.

Maintain TRADING BUYat a revised FV of RM2.41.  All inall, we reiterate our TRADING BUY recommendation on Notion but with a revisedfair value of RM2.41/share ascribed to 8x CY12 PER (previously RM2.43/share),given the higher interest expense arising from the RM16.5m debt raised. Wecontinue to like the stock  following theinclusion of  three new Japanese HDDcustomers into its client base, which would, in turn, boost its profitability and give it a diversifiedproduct mix.

Source: OSK188