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Monday, June 22, 2015

Notion VTec - Asset Light Operating Model

News

In a Bursa announcement, Notion VTec (NOTION) announced a proposal to dispose an industrial land and building comprising a unit of 3-storey office building annexed to a single storey detached factory building and ancillary buildings measuring in total 1.23 hectares (132.0k sq ft) to Frimec International Sdn Bhd (FISB) on an “as is where is” basis for a total cash consideration of RM17.9m (RM135.4/sq ft).
The above-mentioned properties, which are housing the Plant 2’s operations currently (consists of Auto and HDD operations), are located at Jalan Sungai Binjai, Jalan Meru, Klang. It carries a book value of RM7.5m and is valued at 11.7% above the market value of RM16.0m as valued by independent valuers.
Upon completion of the proposed disposal, the properties will be rented to NOTION at a monthly rental of RM90k for a period of 12 months commencing from 19th June 2015.
According to the announcement, the expected gain from the proposed disposal is c.RM8.9m (after RPGT) and the sale proceeds will be utilised for working capital purposes.

Comments

We believe that the valuation of the deal at c.RM135.4/sq ft is fair as the market valuation for the industrial land alone ranges from RM76-RM86 (based on our online channel checks). Meanwhile, the market value (on the whole properties) conducted by independent valuers was at c.RM121/sq ft.
We are POSITIVE on the deal as: (i) We understand that it is in conjunction with the group’s strategy in adopting an asset light manufacturing model, thus enable the group to unlock the value of properties and increase Return On Assets. (ii) The exercise gives the group better floor utilisation. (iii) Although the proceeds from the properties disposed will bring minimal interest savings to the group, the RM17.9m cash proceeds will strengthen NOTION’s balance sheet with its net gearing expected to improve to 0.05x (from 0.11x currently).

Outlook

While the outlook of its HDD segment remains intact underpinned by key products - Antidisc, which is the crucial component for high bulk storage used in the Enterprise segment, we are of the view that the ongoing slow demand for the group’s SLR cam barrel (due to the muted consumer spending globally) could continue to drag the group’s earnings growth.
On its recently-launched online smartphone-selling business, we see stiff competition in the crowded space given high market saturation with renowned brands. Hence, we have yet to impute any earnings forecasts for this segment as we believe any earnings accretion is unlikely to be significant.

Forecast

We raise our FY15E/FY16E net profit (NP) to RM20.0m (from RM10.9m) and RM15.0m (+1%) to reflect the RM8.9m one-off gain. Our FY15E/FY16E core NPs are increased by 1-2% after adjusting for the interest savings and additional rental expenses.

Rating

Maintain MARKET PERFORM

Valuation

Our TP of RM0.43 which is based on a PBV valuation (implied FY16 PBV of 0.35x) remained unchanged due to the minimal impact.

Risks to Our Call

Higher-than-expected SLR camera demand.
Source: Kenanga Research - 22 Jun 2015

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