Recognize it’s a new Season and know it’s the Right Time
1
From Hero to Zero (2012 to 2016) and Resurrection (2017 0nwards):
After 5 long years of trials and tribulations including:
•Thailand greatest flood of 2012;
•Fire in Klang main factory of 2013;
•Loss in the Alcyone silver mine of 2014;
•Massive losses in forex derivative exposure of 2015;
•The stock price hovering below 40 sen for most of 2015 and 2016;
•With near zero institutional holdings except LTH;
•Chairman’s paring down of stock in 2015;
It is not surprising that NOTION was out of the lime light and deemed
to be a penny stock doomed as a written off stock. Destined for the dust pile.
FY2016 is the final ending of the forex derivative contracts and also we have more
cash than debt.
Few were wise to read the accounts and realise that Notion took a RM9.99 million
deferred tax hit (1 once off change in tax treatment of the forex gain/loss of previous
FY15) and if its adjusted the PAT for FY2016 would be RM15 million.
The adjusted PAT margin is 6.5%. About 5.6 sen EPS on an adjusted basis for FY16.
2
Past/Future Performance, RM millions
FY
Rev
PAT
%
EBITDA
%
2010 225
38
17%
73
2011 237
47
20%
Water
2012 309
49
Fire
2013 222
20
Metal
2014 194
Cash
Debt
Cape
x
DPS
Mkt
Cap
32% 35
104
35
4.5
486
92
39% 24
93
40
3
297
16%
97
31% 37
104
72
3
221
9%
75
34% 43
91
20
1
213
(28) (14)
11
6%
23
63
10
0
189
%
Wood
2015 240
(13) (5)%
31
13% 43
37
12
0
108
Earth
2016 230
Adj
15
Adj
6.5%
53
23% 42
20
12
2
100
F2017 +
+
%
+
%
Div
???
F2018 +
+
%
+
%
Div
???
New
Season
3
Summary of FY2016
Operating Results:
RM’ 000
Q4
Q3
Q2
Q1
Revenue
59,599
53,124
56,593
61,063
(57,024)
(46,030)
(47,573)
(49,105)
Gross Profit
2,575
7,094
9,020
11,948
Other Operating
Income
6,815
6,623
(1,755)
8,909
(3,306)
(9,485)
(9,037)
(16,384)
6,084
4,232
(1,772)
4,472
0
(1,915)
4,384
2,841
Finance Costs
(396)
(461)
(535)
(601)
Profit Before Tax
5,643
1,856
2,077
6,712
Profit After Tax
4,640
(5,500)
3,152
3,114
COGS
Operating
Expenses
Operating Income
Derivative
Gain/Loss
4
Technology & Ind Products Stocks Comparison: 4 Rolling Quarters
‘000 RM
Notion
Dufu
JCY
GeShen
Plastics
Innovalues,
S$
Revenue
230,369
176,345
1,740,493
168,666
115,711
PAT adj
15,406
15,080
(8,222)
10,321
18,148
Ebitda adj
52,856
35,434
90,929
26,600
31,106
Market Cap
123,000
118,000
1,009,000
118,000
328,000
PE Ratio
8
8
-122
11
16
Enterprise
Value, EV
101,300
95,600
826,000
149,500
295,200
EV/Ebitda
1.9
3
9
6
10
PBV
0.4
1.0
0.9
1.5
3.7
Assume Notion share price 46 sen
5
New Strategic Expansion Initiatives:
• In line with its product risk mitigation measures, Notion’s management’s
focus will be creating a new business segment: Industrial Products in addition
to its current HDD/Camera/Automotive beginning Q1 FY17. The Johor plant expansion is
targeted at broadening the customer and product base of the Group’s offering into the
Industrial Products segment.
• Next 3 years we have budgeted moderate Capex expansion (limited to its
annual depreciation charges) of amounts RM25 to 30 million each year funded
both by internal funds and bank borrowings. We expect the Automotive components to
grow 30% year on year starting 2017.
• We have found renewed resolve and passion to grow the business in line with any
available opportunities that come our way.
• Higher productive CNC machines and new cutting tool technology and less man
dependent processes will progressively emerge.
• Notion Thailand s expansion will go unabated.
•
Going forward the Industrial Products and Automotive will be more resilient than
Camera and hopefully higher margins products
6
Intrinsic Value of Notion: What’s its Current Worth?
• The valuation of landed industrial properties:
1. Main factory of 600k built up sf on 7.5 freehold acres industrial land in Klang ~ RM55
million
2. Factory of 250k built up sf on 6.5 freehold acres industrial land in Klang ~ RM35
million
3. Factory of 120k built up sf on 4 freehold acres industrial land in Ayuthaya and another
2 acres factory of 50k built up in Ayuthaya ~ RM10 million
4. Total uncharged industrial properties ~ RM100 million
•
Assume cash and liabilities cancel each out.
•
Assume the market cap is RM169 million (share price 63 sen) and hence if we deduct
RM100 million (the land values) we get RM69 million for the whole business of the
Notion Group. FY16’s adjusted Ebitda of RM63 million means any investor would
obtain a 100% ROI in a year. The rest of the 1500 CNCs of say RM150 million and
value of IP, business customers and human assets are FREE.
•
Notion’s valuation is grossly UNDERVALUED even at 63 sen because after
deducting the landed values a buyer is paying it at 1 times FY16 Ebitda.
7
What drives the HDD Industry?
• Disk Drive shipment of 400 mil in 2016 will slow to 330 mil in 2020
• HDD growth is more for data centers and cloud storage
• Capacity-intensive HDD above 8 to 20 Terabytes
• Both SSD and HDD will co-exist
• Consumer drives will be mostly SSD in 5 years time
• End of life beyond 5 years
• Only 3 major players: WD 44%,Seagate with 40% market share
and Toshiba with 16% share
8
SLR Camera/Interchangeable
Lens Shipment:
Source: Camera Imaging Products Association, Japan
9
Single Lens Reflex Camera/
Interchangeable Lens Trends
• Digitization of the filmed camera completed by 2010
• Entrance of the mirror-less SLR camera in 2012
• Steady decline since 2012 in shipment of SLR cameras and Interchangeable Lens
• Notion’s cam barrel is main component in Interchangeable Lens
• Impacted by popularity of camera hand-phone and messaging apps
• Ease of use and fast sharing of photos
• Product innovation and new technology needed to bring disruption
• Consumer behavior will determine the sustainability of the business
10
Global Auto production volume, 2014-21 in millions
11
Automotive Industry: steady growth
• From 86 million auto units in 2014 to 108 million units in 2021 indicative of steady
growth
• Notion auto components in Electronic Braking System getting orders growth.
About 30% growth in 2017 and another 30% in 2018 year on year.
• Auto segment will grow to >35% of Notion’s business in next 2 years
• With a new leadership in USA who is pro business it should augur well for the
economic growth and consumer spending
• With the low Ringgit exchange rate hopefully more orders will flow to Malaysian
component manufacturers
•Our EBS components are used in both cars and trucks
•We are expanding with an additional hard anodizing line in Klang to cope
12
Conclusions:
Opportunities:
•The strong USD and Euro versus the Ringgit currency scenario favors Notion’s exports
component business. The recent BNM currency restriction on exports receivables have
little impact; more an opportunity loss
• Its bank borrowings is extremely low. Its in net cash position
• 3 years of little expansion will end with a modest capex expansion to RM25 million each
year in FY17/18 in high production CNCs, hard anodizing line for auto and new design
insert cutting tool sintering plant
• New Johor and Notion Thailand plants adding 52,000 sf and 30,000 sf production space
for new business expansion
• Adding another business segment to HDD/Camera/Auto: Industrial Products
• Revisiting Aerospace components with AS9100 certification applications for 2 plants
• Dividend Policy will switch to minimum …% of Ebitda
• Automotive and Industrial Products will be main growth segments
• Compared to its peers, Notion has the lowest valuation: 0.4 PBV and EV/Ebitda of 2
times with the market capitalization equal to its worth of its landed properties
13
Concluding Remarks:
Risks:
• Risk of Donald Trump creating a trade war with say China and retaliatory uncertainties
arising
• Risk of USD and Euro depreciating due to economic and political blue swan events
• Possibility of political/economic changes in Malaysia resulting in new investors’
confidence and a stronger Ringgit albeit an unlikely scenario
• Risk of HDD and SLR Interchangeable Lens industries collapsing affecting orders to
Notion
• Risk of ride hailing service Uber creating a slowdown in auto purchases and thereby
affecting the automotive industry
• Risk of losing key managers and directors
Notion’s story is a turnaround, totally neglected stock into a new
opportune season and time for a breakout. A new season of improved
earnings, growth and dividends.
14
NOTION: 10 Years’ Stock Price
Share price declined starting 2011 and found a strong base in 2015 and 2016
15
USD/RM Chart for 5 years
Notion benefits from a strong USD and Euro. The USD has appreciated 40%
against the RM since mid 2015.
16
Notion’s shareholdings:
•
•
•
•
•
•
•
Nikon Corporation:
Family holdings:
Lembaga Tabung Haji
MIDF Asset for Yayasan Sarawak
Kumpulan Sentiasa Cemerlang
Other shareholders:
Total:
9.44%
35.2%
7.21%
1.06%
0.3%
46.79%
100%
17
Notion produced 13 million plungers in 2016
Expected plunger production 17 million in 2017
Plunger production 22 million in 2018
Note: each car or truck needs at least 2 plungers
18
Every Dog has its Day
Every cloud has a silver lining
19