Monday, October 26, 2009
Why I Like Notion VTec (Tons Of Catalysts, Another 3A?)
There are very few companies that can map out growth and expansion strategies properly, particularly if you manufacturing in precision engineering. You need to deliver, be consistent, be a critical part of the supply chain, and deliver well and on time. Then you need to manage your cost well and hope to reach critical mass in whatever you are producing. Track record alone will ensure more business from the big players. The big guys will always want to whittle down their main suppliers, and they need to feel comfortable that they are reliable and can deliver (again).
Just like Success Transformers, Hai-O and Efficient e-Solutions, Notion Vtec has also made the Forbes Asia "Best Under A Billion" list. The list featured the best 200 companies from the 24,155 listed companies in the Asia-Pacific region.
Over the last 2 weeks Notion V Tec has had a strong run up. Is it just participating in the "me-too" smaller caps rally, or is there something more substantial. Notion VTec is one of biggest high precision engineering specialists in Malaysia with 2 manufacturing plants in Klang, Selangor, which it has expanded a few times since its IPO in 2005. Presently, it has about 1,300 employees, and 80% of its factory workers are foreigners. The company has 960 CNC machines at the 2 production facilities. It has obtained ISO 9001: 2000, ISO140001: 2004 and ISO / TS16949 certification.
Notion VTec derives the bulk of its revenue from the hard disk drives (HDD) and digital camera industries. Its key customers are MNCs such as Western Digital, Hitachi and Nikon. Its key products camera cam barrels, digital camera body lens ring, HDD anti-disk, HDD disk clamps, HDD spacer rings and so on (refer to Appendix I for details on key products). Other industries with a lower sales contribution are the automotive, consumer electronics and air conditioning sectors.
Its top customers are the biggest players in the HDD and digital camera industries the likes of Western Digital, Hitachi and Nikon, as such, Notion VTec’s business will be reflective of the performance of the two industries. HDD division (44% of group’s revenue) is seeing continuous strong demand from its key customer namely Western Digital. Demand for storage has been very firm on the back of rising digitalization. Compare that to Seagate which is still mired the problems associated with the acquisition of Maxtor.
Camera (46% of group’s revenue) is also seeing uptick in demand. As price points moved lower (for the SLRs), demand elasticity kicked in with higher volume being experience in the SLRs space. Nikon being its major customer (which commands some 40% of global SLRs) is once again loading up Notion for its quality and strong execution.
Notion VTec is in the midst of finalizing the acquisition of a production facility (23,000 sq ft) for a sum of RM5m in Thailand. The new facility will gear up to produce camera components for its key customer – Nikon beginning 1QCY2010. Plans are afoot to expand the production floor space to 100,000 eventually.
Catalyst #1 - New 2.5inch form factor: The project will involve the supply of base plates with contribution likely to hit RM4m per month (ASP USD1.25 x 1m pieces per month) or RM48m per annum on proforma. Initial ramp will be circa 100,000 per month rising to 1m eventually (tentatively by June 2010). Previously concentrating only at the 3.5inch form factor, the new client offers a golden opportunity for the group to tap into the higher growth form factor which includes notebooks and other mobile devices. The new 2.5inch project should propel group to hit revenue of RM1 billion in the near future. Using 600m units HDD per annum as a reference and 5% market share for the group, number of units will work out to be 30m pieces, that will translate into additional earnings of RM60m or 8.5sen EPS. Considering it is making just RM36m in net profits now, that is a quantum leap.
Catalyst #2 - Notion VTec has just been qualified by a new HDD customer, Samsung, to produce 2.5” HDD components. This is one factor which would propel Notion VTec to a higher growth platform in FY10 and FY11. Without this qualification, the company would only at best grow organically in tandem with the industry’s growth rate. This qualification by Samsung allows Notion VTec to mass produce 2.5” HDD components for the first time. Before this project, 90% of its HDD components is for the 3.5” HDD segment. Samsung has ordered the company to start mass production on 2.5” HDD components by November. Notion VTec is the second supplier for this particular component.
Catalyst #3 - Margins defensability: While Notion VTec’s consistently high margins of 25% since FY04 is impressive, it also stands out as being able to turn in the highest margins among its public listed peers in Malaysia. Notion VTec’s high volume products such as disk clamps, anti-disk and spacers for HDD are very profitable as each clamp and spacer only weighs 2 to 5 grams respectively, and so its material content is limited to less than 25% of its cost. By making its tools and fixtures in-house also brings down costs further. As for the digital camera segment, since the company started supplying high volumes of cam barrels to Nikon in 2007 and other digital camera makers prior to Nikon, the pricing pressure has been mitigated by the continuous introduction of new camera models, which enables Notion VTec to price its components at better levels.
Revenue 104.5m (2007); 146m (2008); 165m (estd.); 214m (2010 estd.)
Net Profit 26.6m (2007); 32.9m (2008); 36.7m (2009 estd.); 45.5m (2010 estd.)
EPS (sen) 4.5 (2007); 4.7 (2008); 5.2 (2009 estd.); 6.5 (2010 estd)
DPS (sen) 2.9 (2007); 1.4 (2008); 1.3 (2009 estd.); 2.0 (2010 estd.)
What's interesting was that the company still pays out decent dividends (considering its 703m shares issued). Herein lies the key, it is likely that the controlling shareholders want to hold onto their stakes, and as such they would probably "want" to live on the dividends. That is likely because if you look at the planned capex, its aggressive. Obviously, management is confident about their prospects. Notion VTec has budgeted for the second highest capex of RM50m for FY10 since its IPO in 2005. A sum of RM20m will be used for the Klang plant while RM30m will be spent for constructing the new Thailand plant. So far, RM20m in capex has been spent for 9MFY09 and another RM20m is expected to be spent on 103 new CNCs in 4QFY09. Hence, the total capex of RM45m for FY09 means that Notion VTec is expected to incur high capex for 3 consecutive years, at least until FY10. That to me, is a very good indicator.
Shares Issued: 703m
K.I. Permodalan Felda 15..0%
Choo Wing Hong:: 14.4%
Thoo Chow Fah: 10.9%
Choo Wing Onn: 10.6%
Revenue breakdown by key customer
FY08 / FY09e
Western Digital 30% / 36%
Hitachi 9% / 5%
Nikon 33% / 31%
PMG Klang 7% / 5%
Others 20% / 23%
Catalyst #4 - The company has just announced that they have approval to issue and place out 10% additional shares. This should be the biggest kicker. It all ties in with the capex expansion plan. While there have been whispers, I also do not want to over-speculate. Just think for a moment if the 10% is placed out to one of their top 3 clients - that will go a long way to securing long term business and gain a lot more market share of order from that client alone. The 10% if placed, say to Nikon, will not hinder its relations with other customers because its not a substantial stake, but it will elevate Notion VTec to a higher level of acceptance by other customers (if its good enough for Nikon, its good enough for me).
If its Nikon or Western Digital, could this have the same effect as Wilmar had on 3A Resources? Probably not as fantastic because the 3A situation is being transformed in its scalability by latching onto Wilmar's reach and distribution. In Notion's case, although it will be good, it will not be as exciting in terms of "scalability", but still very very good. If you note their corporate actions, they will be doing a 5 shares into one exercise, ex Nov 3 I think, that is a very good move to solidify the share base and capitalisation - hence it is likely that they will announce the placement just prior to the ex-date.
NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
p/s photos: Goto Maki