Friday, March 18, 2011

Notion Vtec - Working Hand In Hand With Key Partner In Times Of Dislocation

In times of massive uncertainty and dislocation, many businesses will be impacted. The demand for local timber companies would spurt as was reflected in the run in share prices over the past few days. Here, I have to clarify that we should not be assessing the fallout effects as an impartial investor, as that would be making light of the overall terrible human tragedy. We still have to monitor the changes that are taking place but with a sobering mindset.

I have not featured stocks other than Coastal for the past few weeks. I am being very careful in choosing what to write about. After reading through the latest analysts' breifings with Notion's management, and talking to management of the company, I am keen to write something on Notion.

Notion manufactures cam barrels for major camera brands like Nikon and Canon, whose plants were unfortunately hit by the natural disaster that struck Japan last Friday. It was reported on Nikon’s website that it has suspended operations at 4 of its plants, namely Sendai Nikon Corporation (where it produces high-end professional DSLRs like F6), Tochigi Nikon Precision and Miyagi Nikon Precision (which both produce high-quality lens for applications in lithography steppers and scanners used in IC and LCD manufacturing) as well as Tochigi Nikon Corporation which makes interchangeable and optical lenses.

Given the uncertain outlook for HDDs compounded by capacity glut, weak demand for netbooks and the rising demand for alternative storage drives i.e. solid state drives (SSD), Notion islooking to focus on the production of camera lenses. Already, Notion is ramping up in Ayuthaya, Thailand to take on geographical advantages of Nikon’s plant in the area.

Investors looking too closely at their HDD business will be missing the point in assessing Notion because its not a significant business segment for them. If you consider their strategy for the past 2 years, its the camera business segment which they have a strong niche, and much better margins. Their expansion plans in Klang and Thailand are all geared towards that, so too was the inking of the share placement to Nikon.

Its plant in Natori in Sendai, which makes top-end DSLR cameras, is among the factories forced to close after equipment and buildings were damaged. Notion’s camera division contributed >50% of its consolidated revenue as of 1QFY11, with Nikon as its key customer. Prolonged disruption in Nikon’s operation and production could put a dent on our earnings forecasts although management said that there is no immediate stop order on its cam barrel production for now.

All affected Japanese companies are working feverishly to replan their contingencies and production chain flow. Notion has been in active discussions with Nikon to relocate all machining works previously held at Sendai Nikon factory (which is damaged but extent of stop work is uncertain) to Notion Factory 3 which has clean room facilities and ample room for any such contingencies. In fact Notion has 190,000 sf of built up space which was meant for the 2.5" baseplate manufacture now available for such transference of operations. Notion also have enough labour & capacity to take on such a major project at short notice. Sendai factory does a lot of high volume lens mount (the circular metalic part on camera body and the other on lens body) which is in brass and require chroming surface treatment.

The other thing to bear in mind is that factories affected in the Sendai area will take probably a year to be up running again, even then the planning will be affected as we can safely say that there won't be much electricity being supplied owing to the calamity with regards to nuclear power plants. Hence rationing of electricity will be a major issue, which will affect the viability of re-setting up such operations there.

From the way discussions are headed, it is very likely that Nikon will shift a substantial portion of "DSLR camera works" to the Klang factory. Notion being a mindful partner, is willing to work around the issues. The immediate effect should bring in about an additional RM60m a year in revenue as a start.

Besides the financial effect, I believe this brings the ties between the companies a lot closer, and in Notion's case its value as a "trusted valued partner" will be enhanced.

The following was my posting on Notion Vtec last month. I still am comfortable with what I wrote, and I believe the developments over the past few days actually adds to the "inherent value" of the company. The additional revenue would probably boost its net profit by about 10%-15% over the next 12 months.

Notion Vtec - The shares hit a bottom recently at around RM1.70 on very thinly traded volume following the downgrade of earnings. Now almost every analysts and funds seem to be hovering over the company like vultures on under valuation radar. There were rumours of a private equity potential buyout offer at much higher levels a few weeks back as well. That is speculation but what is true is the oversold label for Notion Vtec.

Maybank research came out with a good report recently and that they expect NVB’s 1QFY11 core results to be robust, likely ahead of consensus forecasts. Maybank's current FY11 net profit forecast is 14% above consensus. The camera segment (from new sub-assembly orders) will drive FY11 growth while the HDD section will take a back seat. We maintain our 2-year net profit CAGR forecast of 38% and introduce FY13 forecast. NVB is expected to release its 1QFY11 results in the third week of February. We estimate NVB’s 1Q revenue to be around RM56m-60m (+9-16% QoQ) with net profit of RM11m-14m (+34-71% QoQ) on stronger net margin (+2.4-9.1 ppt QoQ). This would imply 23- 29% of our full-year net profit forecast, and 25-32% of consensus.

While Maybank's estimate for 1Q net profit is already above consensus, I believe even that could be surpassed as the camera business remained solid the last time I spoke to industry experts. The over selling owing to their HDD business has been way overdone, and actually should not figure prominently as a significant segment of their biz model.

Another fact overlooked by many is that they will be getting MSC tax status which could further lift EPS by 6 sen. Maybank sees a target price of RM2.40, I am more bullish with a target of RM2.60 within 3 months. The emergence of any genuine M&A exercise would only be a bonus to their already solid fundamentals.

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.


Wai Mun said...


Robin Lee said...

Hey Dali,

Thanks for posting on Notion.

Are lens mounts and barrels the only production Notion runs? Do they manufacture lenses as well? What about the electronics in the camera?

If it's just the "hardware" - barrel and mount, do you think this slice of pie is lucrative?


SOFA said...

Let's punt.