Notion VTec Bhd
(June 22, RM0.375)
Maintain market perform with a higher target price of 43 sen: In a Bursa Malaysia announcement, Notion VTec (Notion) announced a proposal to dispose of a piece of industrial land and a building comprising a three-storey office building annexed to a single-storey detached factory building and ancillary buildings measuring in total 1.23ha (132,000 sq ft) to Frimec International Sdn Bhd (FISB) on an “as is where is” basis for a total cash consideration of RM17.9 million (RM135.4 per sq ft).

The above-mentioned properties, which are housing the Plant 2’s operations currently (consisting of auto and hard disk drive [HDD] operations), are located in Jalan Sungai Binjai and Jalan Meru, Klang. It carries a book value of RM7.5 million and is valued at 11.7% above the market value of RM16 million as valued by independent valuers.

Upon completion of the proposed disposal, the properties will be rented to Notion at a monthly rental of RM90,000 for a period of 12 months commencing from June 19. According to the announcement, the expected gain from the proposed disposal is circa RM8.9 million (after real property gains tax) and the sale proceeds will be utilised for working capital purposes.

We believe that the valuation of the deal at circa RM135.4 per sq ft is fair as the market valuation for the industrial land alone ranges from RM76 to RM86 (based on our online channel checks). Meanwhile, the market value (on the whole properties) conducted by independent valuers was at circa RM121 per sq ft.

We are positive on the deal as we understand that it is in conjunction with the group’s strategy in adopting an asset light manufacturing model, thus enabling the group to unlock the value of properties and increase return on assets. The exercise gives the group better floor utilisation. Although the proceeds from the properties disposed of will bring minimal interest savings to the group, the RM17.9 million cash proceeds will strengthen Notion’s balance sheet with its net gearing expected to improve to 0.05 times (from 0.11 times currently).

While the outlook for its HDD segment remains intact underpinned by key products — Antidisc — which is the crucial component for high bulk storage used in the enterprise segment, we are of the view that the ongoing slow demand for the group’s single lens reflex cam barrel (due to the muted consumer spending globally) could continue to drag the group’s earnings growth.

On its recently-launched online smartphone-selling business, we see stiff competition in the crowded space given high market saturation with renowned brands. Hence, we have yet to impute any earnings forecasts for this segment as we believe any earnings accretion is unlikely to be significant.

We raise our financial year 2015 estimated (FY15E) and FY16E net profit (NP) forecasts to RM20 million (from RM10.9 million) and RM15 million (+1%) respectively to reflect the RM8.9 million one-off gain. Our FY15E and FY16E core NP forecasts are increased by 1%-2% after adjusting for the interest savings and additional rental expenses. — Kenanga Research, June 22

This article first appeared in The Edge Financial Daily, on June 23, 2015.