This article first appeared in The Edge Malaysia Weekly on November 11, 2019 - November 17, 2019

PRECISION parts manufacturer Notion VTec Bhd has been largely off the radar screen of investors since October 2017 after a fire damaged its primary manufacturing facility in Klang, Selangor.

The company’s recovery process — making a claim on its insurance policy, relocating its facilities and hiring factory workers — took nearly two years, with its operations fully restored at end-September this year.

This seems to have attracted investor attention over the past few weeks, as evidenced by Notion VTec’s share price surging 54% in one month, from 53.5 sen on Oct 1 to 82.5 sen — its highest level since October 2017 — on Oct 31.

But a new development that many may not be aware of is that the company has secured a European client to which it will supply the metal parts — both machine and fabricated parts — for its products.

This means that Notion VTec is entering the space dominated by local electronics manufacturing service (EMS) providers VS Industry Bhd, SKP Resources Bhd and ATA IMS Bhd — three of the largest homegrown EMS providers in Malaysia — that are notable contract manufacturers for a European multinational corporation (MNC) best known for its home appliances.

“The order will come directly from the European client and it will tell us which of the three EMS providers we should be channelling them (the parts) to,” Notion VTec executive chairman Thoo Chow Fah tells The Edge in an interview.

He says the European MNC has been sourcing metal parts from China and some local players, but most of them have not been able to cope with the demand.

“Some of the projects that we are doing, we actually got the green light from the chairman [of the European MNC]. He is very impressed by our capability and he likes the quick response from us,” Thoo says proudly.

However, he acknowledges that Notion VTec, which just started venturing into the EMS space about 18 months ago, is still relatively new in this supply chain.

“We don’t do the plastic parts and PCB (printed circuit board). The contract manufacturers will handle those parts. We are the specialist in metal parts, especially the aluminium parts. If we wanted to, we could be an EMS player in the future. But there is no [such] immediate plan,” says Thoo.

Growing the EBS market

Those familiar with Notion VTec would know that the company is a major player in the car industry. It produces components for electronic braking systems (EBS) under its automotive segment.

The company recently secured three new automotive customers, namely Delphi Technologies, Hilite International and BorgWarner, with orders expected to start coming in within the next six months.

“The automotive sector is another area that we will continue to focus on. Many people are not aware that we are one of the largest auto braking plunger suppliers in the world,” says Thoo.

Notion VTec produces 30 million pieces of plungers annually for 15 million cars, as each braking system would need two plungers. Given that the global production of cars is about 90 million annually, it essentially means that one in every six cars in the world has plungers made by Notion VTec.

“We are talking about not just Proton cars but also Mercedes-Benz, BMW, Audi, Volkswagen, Mitsubishi … our parts are being supplied to everywhere in the world,” says Thoo.

Notion VTec’s clients for its EBS components include ZF TRW — a subsidiary of ZF Friedrichshafen AG — and Continental AG, both of which are listed companies from Germany, as well as Diamet Corp, a subsidiary of Japan’s Mitsubishi Materials Corp.

Overall, Thoo expects the automotive segment’s revenue contribution to the group to increase to 40% in the financial year ending Sept 30, 2020 (FY2020), from 35% in FY2019.

Meanwhile, revenue contribution from the EMS segment is expected to increase to between 20% and 30% by FY2021, from 10% to 15% in FY2019.

While Notion VTec’s share price has risen considerably, Thoo believes the stock is still far from being fairly valued when compared with the company’s net tangible assets of RM1.21 per share as at June 30 this year.

“We would like to think that Notion VTec is still a growth stock and that our shares are undervalued. We have a lot more new businesses and customers coming in. Hopefully, that will propel our earnings performance.

“I think the market realises that our operations have recovered, hence there has been more interest in our stock. In fact, some fund managers think that our company is underrated,” says the 66-year-old mechanical engineer.

Thoo was appointed to the board of Notion VTec in February 2005. He is the brother-in-law of managing director William Choo Wing Hong and executive directors John Choo Wing Onn and Choo Wing Yew.

As at Dec 31 last year, the Choo brothers and Thoo collectively owned 23.23% equity interest in the company.

Year to date, Notion VTec has gained 26%, closing at 76.5 sen last Tuesday, giving the company a market capitalisation of RM253.8 million. This pales in comparison with the rise its share price saw before the factory fire. Recall that the stock had climbed to a multi-year high of RM1.29 in May 2017.

According to Thoo, the group has a target to achieve a market capitalisation of RM1 billion by 2024 — a threefold increase within five years.

“Notion VTec has gone through many negative surprises over the years. We have been seen as a volatile stock. This doesn’t give much comfort to the shareholders. It takes time for us to rebuild our foundation. We need to have that element of trust again,” he says.

Based on its closing price of 76.5 sen, the counter is currently trading at a historical price-earnings ratio of 7.9 times and price-to-book value of 0.6 times.

The fire incident had significantly impacted Notion VTec’s operations since FY2018.

The company slipped into the red with a net loss of RM4.4 million for the nine months ended June 30, 2019 (9MFY2019), against a net profit of RM8.2 million in 9MFY2018, partly due to the relocation and moving expenses incurred.

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