Positive conviction on Notion reaffirmed as prospects remain intact

KUCHING: Analysts have reaffirmed their positive conviction on Notion Vtec Bhd ( Notion), as they believe the group’s near-term prospect remains intact.

The research arm of Kenanga Investment Bank Bhd’s ( Kenanga Research) said the nearterm earning driver, namely the stack- up orders of Automotive EBS components from Notion’s new customers, remain intact.

“To recap, additional 25 CNC machines have been allocated for higher orders from new customers,” it said.

The research arm noted that all in, for the automotive segment, the total volume growth could see a two-year compound annual growth rate (CAGR) of 30 per cent with another 50 CNC machines to be invested next year.

As for the HDD segment, Kenanga Research said management is getting orders from third party machining as well as adoption of helium drives (for nearline enterprise) to supersede industry growth.

“Meanwhile, the recent news on SSD supply constraint (with HDD as a substitution) is also a shortterm booster,” it added.

On the engineered products segment, Kenanga Research highlighted that Notion has rejigged the group’s portfolio by allocating the capacity in the camera segment to cater for better margins and higher resiliency products.

“As reported in the Bursa announcement, these new fatter margin products such as design of tools, jigs and fixtures for customer manufacturing are seeing lights with the emergence of several new customers.

“All in, the ideal mix for HDD/ engineered products/auto is 30 per cent: 40 per cent: 30 per cent in 2018,” the research arm said.

Kenanga Research noted that the NOTION-WB warrants – oneforone equity call warrant with a total outstanding amount of 38.6 million warrants and exercise price of RM1 each – that is poised for expiration on May 2, 2017, is already In-The-Money.

In the Blue- sky scenario, assuming full conversion of 38.6 million warrants which could generate cash up to RM38.6 millon to the group, the research arm reasonably believed that the cash will come in handy for the group to expand into new business.

Kenanga Research’s assumption was based on the fact that the group’s utilisation rate is already running close at full capacity, Notion’s aggressive expansionary mode based on management’s track of record in FY12-16, of consistently venturing different segments to grow the group’s business and its net cash position which does not require the cash for debt repayment.

“While we have yet to impute any warrants conversion for now, we reckon the potential cash injection would be utilised for growth opportunities,” it said.

Post meeting, Kenanga Research made no changes to its financial year 2017-2018 estimate earnings given the scarcity of details and maintained ‘outperform’ on Notion.

However, the research arm raised its target price to RM1.62 per share.