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Notion Vtec Bhd
(Jan 26, RM0.46)
Maintain market perform with target price (TP) of 46 sen:
Although global hard disk drive (HDD) shipments will likely remain flat till 2018 (according to the forecast of International Data Corporation), the total Exabyte (unit byte for digital information) is forecast to be on the uptrend with high bulk storage being the growth driver. Taking a cue from this, management is positive on its HDD business as the group’s key product — Antidisc (80% of HDD revenue) which skewed towards the enterprise segment, is the crucial component for the high bulk storage.

Meanwhile, on the product replacement risk from solid state drive, management noted that it will not be an imminent threat to the HDD sector given its persistent high cost per Gigabyte (still 5-10 times more costly than HDD depending on the inches).

Touching base on organic revenue expansion, management highlighted that it has recently approached another vendor of world-renowned HDD makers to expand its market share. Should this catalyst materialise, the group believes its HDD revenue could register a robust three-year compound annual growth rate of a minimum 10%.

Management is still cautious on the single-lens reflex (SLR) cameras demand in light of muted consumer spending as well as the high base effect that was built during the previous demand boom for the SLR (amidst the migration from analogue to digital cameras).

Notion_27Jan2015_theedgemarketsMeanwhile, margins are also deteriorating given the shift of its business model to high variety-low volume manufacturing in light of stiff competition (of which operational efficiency is the key challenge). As a mitigation step, the group had allocated parts of its capacity to cater for the resilient HDD business.

On its foray into the smartphone glass manufacturing, management noted that it is still at the research and development phase, ironing out some glass tempering issues. Meanwhile, on the online smartphone-selling business (by sourcing mid-end model phones from Chinese smartphone players with own brands labelling; minimal capex is required), management noted that it is ready to kick start anytime soon. Management is targeting to sell 50,000 phones in the first year of launching, with hopes to reap in mid-single digit bottom line margins. Note that we have yet to impute any earnings forecasts on this segment given the scarcity of details

While stronger appreciation of the US dollar will typically benefit exporter’s profitability given their export-oriented earnings profile in US dollar, management mentioned that the group is not gaining from the trend due to unfavourable currency hedging position at RM3.20/US dollar, to expire in mid-2015.

While we have great respect for the management’s transformation effort, we believe any light at the end of the tunnel could only be seen in financial year 2016 (FY16). We maintain our FY15-FY16 earnings estimates for now with an unchanged TP. — Kenanga Research, Jan 26

 

This article first appeared in The Edge Financial Daily, on January 27, 2015.

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