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Saturday, August 7, 2010

KLCI Stock - NOTION / 0083 - 2010 Quarter 3

Market Cap : 154561378*2.04 = 315,305,211.12 (Small)
NTA per share : 224957/154564 = 1.46
P/BV : 2.04/1.46 = 1.3973
Forecast P/E now : 2.04/0.1382 = 14.76 (High)
ROE : 20.79% (High but expect to drop)
DY : 0.025/2.04*100 = 1.23% (Low and expect no dividend in coming quarter)
Fixed Asset Turnover(3 year) : (0.6253+0.6954+0.5852)/3 = 0.6353 (Low)
Liquidity Ratio : 142783/67705 = 2.1089 (Moderate)
Receivables Collection Period : (68149+42148)/2/(228189/365) = 88 days (Acceptable)
My Target Price : Not interested unless company issue stabilising
My Decision : NOT BUY
My Comment : Revenue increasing but profit dropping largely, cash flow from operating still not enough to cover investing, above moderate debt and increased, navps decreased, facing quality issues on HDD components, weaker USD, EURO deteriorated
Technical Support Price : Not available
Risk Rating : HIGH
OSK Target Price : 1.46 (06 Aug 10)

My notes based on 2010 quarter 3 report (number in '000):
- For 3Q of FY2010 the Group recorded higher revenue but lower PAT by 74.8%. The lower earnings is mainly attributable to initial start up cost of new projects such as R&D, depreciation of machineries, materials and labour whereas the earnings will only come on stream in the following quarters. There were quality issues for one of our HDD components which resulted in rectification and compensation cost. The Group were also affected by the weaker USD and Euro for the quarter under review
- In Q3FY2010, HDD parts revenue recorded RM27.9 million (Q2FY2010: RM26.9 million), camera parts recorded RM23.3 million (Q2FY2010: RM20.4 million) whilst the industrial/automotive revenue was at RM9.6 million (Q2FY2010: RM9.2 million). The product mix for the Q2FY2010 was HDD:Camera:Industrial/Automotive of 46%:38%:16% compared to previous quarter's mix of 48%:36%:16%
- For Q4 FY2010, revenue will be lower compared to Q3 due to lower orders from the HDD sector. We also expect minimal contribution from the 2.5" baseplate project as we tackle the problems of casting, machining and ED coating and getting the stator assembly into operation
- The higher anticipated rejects arising from this base plate project are to be finalized and the loss will be taken up in the 4th quarter. Also the additional cost of manpower, rent, tooling, electricity, depreciation, financial cost and others will still burden the cost of production until such time the baseplates are delivered in quality and quantity to client. We therefore, do not expect the net margin to improve in the quarter
- The SLR camera/lens segment will have increased orders this quarter and we expect the auto/industrial segment to have little growth
- The lower USD has weakened from 3.40 to 3.20 (6%) would have its negative effect on the revenue even with currency hedging at the 3.30 level. The Euro has deteriorated from 4.90 to current spot rate of 4.10 or 16% lower against the Ringgit
- Notion has about 7% of its revenue in Euro and it would have negative impact on these receivables
- The lower USD also affected the earnings as we exchange the earnings into a stronger RM. Notion has about 85% of its revenue in USD
- The substantially weakened Euro again has its effect on earnings
- The major change in the last 6 months is the European debt crisis starting with Greece and spilling over to Spain, Portugal, Ireland and East European countries. These countries have massive government debts and so the governments will implement austerity measures which will dampen the economic growth of Europe. The crisis is still continuing with no end yet in sight. Naturally consumer and corporate spending will also be affected which will be a dampener for business
- Our main HDD customer has reported that this crisis and the weaker Euro have affected orders and this trend may continue for some time. The persistently high unemployment rate in the US is also affecting consumer spending. China is also said to be slowing as their government tries to temper the bubbly property market
- Orders in the antidisk components were stopped in one program following a hydrocarbon contamination problem. A lot of management time and resources was directed towards solving the problem. In the end, the customer cut orders on the affected component and for final cleaning of the 2 remainder antidisk models, We had to outsource to a Singapore vendor with increased cost. We spent time and substantial resources in relocating and upgrading the final washing facilities in order to comply with customer's requirements
- The 2.5" HDD baseplate project has not been performing to expectations resulting in delays to production targets, excessive start up costs in moulds, fixtures, jigs, tooling, quality equipment, excessive rejects at diecasting, machining and also at the customer vendor based in Dongguan, China
- Factory 3 is still being retrofitted and the manufacture currently is dispersed between Factory 1 and 2 and also an ED coating supplier based in Banting; all adding to further inefficiencies. Management needs time to reorganize the manufacturing processes of the base plate project. Factory 3 is expected to be operational by September 2010
- For the Quarter, the cost of production has risen faster and steeper than the rise in revenue thus squeezing the margins
- The Board also request for patience from the shareholders as it attempts to apply corrective measures to control costs, minimise rejects and maximise its production capacity and it is envisaged that it may take up to 3 quarters to stabilise the baseplate project
- Estimate next 4Q eps after 2010 Q3 result announced = 0.0192*3+0.0806 = 0.1382(It may take 3Q to apply corrective measures to control costs, minimise rejects and maximise its production capacity), estimate PE on current price 2.04 = 14.76
- Estimate next 4Q eps after 2010 Q2 result announced = 0.3788 (0.1804*2 = 0.3608, 5% grow from 0.3608), estimate PE on current price 3.21 = 8.41(DPS 0.025)
- Estimate next 4Q eps after 2010 Q1 result announced = 0.3674, estimate highest/lowest PE = 9.44/7.57 (DPS 0.03)
- Estimate next 4Q eps after 2009 Q4 result announced = 0.0185*4 = 0.074, estimate highest/lowest PE = 11.62/9.95 (DPS 0.03)
- Estimate next 4Q eps after 2009 Q3 result announced = 0.0158*4 = 0.0632, estimate highest/lowest PE = 8.39/5.49 (DPS 0.01)
- Estimate next 4Q eps after 2009 Q2 result announced = 0.0065*4 = 0.026, estimate highest/lowest PE = 13.46/9.23 (DPS 0.01)
- Estimate next 4Q eps after 2009 Q1 result announced = 0.0103*4 = 0.0412, estimate highest/lowest PE = 6.8/3.64 (DPS 0.01)

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