Notion Vtec - BUY - 14 May 2008

Notion VTEC - 1H08 results in line (Results Note)

Price: RM0.42

Target Price: RM0.51

Recommendation: BUY



· 2Q08 results are generally within expectations as company continues to showcase its strong execution capabilities. Continuous strong demand for HDD and camera components have underpinned the current positive set of interims. For the six months, topline of RM65.9m is already 47.2% of our full year's while net profit is 51.3%.

· QoQ, topline was higher by 15% boosted by the higher camera component sales. PBT level was however flat with net profit dipping 13.1%. An adverse exchange rate environment with the RM strengthening 3.6% on a sequential basis, higher raw material costs as well as higher effective taxes were chiefly to blame for the weaker showing at the bottomline level. GP% is therefore lowered to 33.6% from 37.5% previously while net % is 21.6% during the current quarter versus 28.6%.

· YoY, 2Q08 topline grew by 24.7% on higher capacity and loadings from key customers while bottomline was flat due to the adverse exchange rate environment. For the six months, topline was up 13.6% while net profit grew at a lower pace of 7.4%. While GP% was lowered to 35.4% in 1H08 from 42.1% previously, net % however is relatively more stable at 24.9% versus 26.3% previously. At the current profitability, it is still trending above our expectations which we had factored in tougher operating conditions.

· Cameras have been the outperformer. During the quarter, strong demand from its key customer - Nikon which has been aggressively rolling out new products ahead of the Olympics in August have translated into strong orders for the company. As a result, camera component is now the highest revenue contributor to the group, accounting for 47% of sales (1Q08 : 34%) with HDD contribution diluted to 39% (1Q08 : 52%).

· HDD was also growing with growth coming from all components ranging from anti disk to disk clamps and spacer rings. The new component - anti disk have experienced strong growth since Western Digital's initial loading in FY4Q07. In fact, management is expecting this component loading to increase by >100% beginning May fromFY1Q08.

· Forecast and BUY recommendation is maintained. Rising capacity and best-in-class execution capability makes Notion our top exposure in the precision component fabrication space. Trading at an undemanding 7.7x current year's earnings, our BUY and target price of RM0.51 based on 9x CY08 earnings is maintained. A 1:5 bonus issue and subsequent transfer to the Main Board should boost profile and investability.







KENANGA INVESTMENT BANK BERHAD (15678-H)