Notion VTec makes hard disk drives for major customers
KUALA LUMPUR: Kenanga Investment Bank Research has downgraded precision parts manufacturer Notion VTEC Bhd
to market perform with a more conservative target price (TP) of 73 sen from RM1.55.
It said on Monday it prefers to stick on the conservative side for now given the major disruption to its production capacity which could lead to the uncertainty in earnings visibility.
“With 0.65 times FY18E price-to-book value (PBV) being ascribed (which is the group’s five-year average PBV), our TP is now at 73 sen from RM1.55 which implied FY18E price-to-earnings ratio (PER) of 15.5 times,” it said.
Kenanga Research said a fire outbreak had occurred in Notion VTec’s main manufacturing plant in Klang, which could affect up to 50%-60% of its total production capacity.
However, the full financial and operational impact of the incident is yet to be ascertained.
“While we understand from management that the assets and the potential earnings losses could be fully covered by insurance coverage, we prefer to stick on the conservative side for now, which led us to cut FY18E earnings by 54%,” it said.
The fire had occurred at its main manufacturing plant in Klang (which mainly produce HDD, camera and automotive parts).
The incident affects its units Kaiten Precision Sdn Bhd, Notion Venture Sdn Bhd and Autic Mekki Sdn Bhd).
Recall that in end-2012, a fire also broke out at the rear building of this main manufacturing plant with losses of about 100 computer numerical control (CNC) machines and affected 25,000 sq ft of its production space.
Kenanga Research pointed out there was a disruption to Kaiten Precision Sdn Bhd’s business for up to six months when the fire claim was initiated. The insurers then took nine to 12 months to reimburse the company more than RM30mil for the fire loss as well as business interruption loss.
“From our preliminary understanding from the management, we gather that the main plant has been severely damaged with as much as c.50%-60% of the production capacity affected.
“Meanwhile, the number of CNC machines affected was about 500 units out of the group’s total 1,600 machines.
“While management has yet to ascertain the full financial and operational impact of the incident, our preliminary understanding is that the assets losses as well as the potential earnings losses could be, in best case scenario, fully covered by its insurers.
“However, the gestation period could be longer than the previous incident (which was six months) considering the more severe impact this time around,” it said.
Notion VTec said on the asset losses, it believed the impact could be easily more than RM125mil with breakdown being: net book value of RM23.6mil for its Lot 6123 premise as well as RM100mil for CNC machines (assuming RM200,000 for each of the 500 units).
“Meanwhile on the core earnings impact, with our base case assumption which had factored-in the preliminary guidance, potential gestation period, as well as the opportunity costs (assuming 50%-60% of the production affected for its HDD, camera as well as automotive production), our FY18E revenue could be lowered by 43%, which might impact our FY18E NP forecast by -54% to RM15.5mil.
“That said, not all are gloom and doom as we understand that the new earnings driver, which are the new consumer electronics products (to be produced in Johor plant) are unaffected and are still on track for delivery to anchor its FY18 earnings,” Kenanga Research said.
Limited time offer:
Just RM5 per month.
