Notion VTec forecasts dip in revenue

Notion VTec Bhd released weaker results for the third quarter of its financial year ending Sept 30, 2010 (3QFY10) yesterday and projected lower revenue levels for the following quarter, due to slower orders of hard disk drives (HDD).

In 3QFY10 (April-June 2010), net profit dipped 73% year-on-year (y-o-y) to RM2.97 million from RM11.09 million. Revenue climbed 36% y-o-y from RM44.71 million to RM60.81 million, while EPS dropped from 7.88 sen to 1.92 sen.

This was mainly due to the lower gross margins, which dipped from 36% in the prior year’s quarter to 13%.

“The lower earnings are mainly attributable to foreign exchange movements, initial start-up costs of new projects such as R&D, depreciation, materials and labour,” said the company.

In the announcement, the company also drew attention to the problems in its 2.5” HDD base-plate project.

“The higher anticipated rejects from this base-plate are to be taken up in the fourth quarter. Also, additional costs of manpower, rent, tooling, electricity and others will still burden the cost of production. We do not expect the net margin to improve in the quarter,” said the company.

An analyst said high initial start-up costs and reject rates from 2.5” HDD base-plate project had been a major factor causing the squeezed margins, rather than a slowdown in HDD demand.

He also said this was normal whenever a company embarked on a new product line. He noted that Notion also faced teething problems when it started production of anti-disks for HDDs earlier, which were eventually ironed out.

The analyst also pointed out that Notion’s topline growth remained broad-based, with revenue growing 36% y-o-y and 7% from the previous quarter. On a quarter-on-quarter basis, camera sales were up 14%, industrial and automotive sales rose 4%, while HDD was up 4%.

The company expected the SLR camera or lens segment to experience an increase in orders, while the auto or industrial segment are likely to remain at similar levels.

Analysts said although revenue was expected to climb, full year net profit for FY10 was expected to fall slightly from the RM35.9 million registered in FY09, as growth in the company’s camera and industrial division partially mitigated the losses from the HDD segment.

In the quarter, Notion derived 38% of its revenue from the camera segment, 16% from the industrial and automotive division, and 46% from HDD components.

In the last two weeks, shares of HDD component manufacturers were sent reeling after a dour profit announcement from Seagate Technology and a forecast warning from Western Digital emerged.

Based on research reports released so far in August, two analysts have a buy call on the share, while two opted for a sell. There were no hold calls. The average estimated target price was RM2.67 per share.

Notion’s shares hit a low of RM2.01 on Aug 4, a far cry from its three-month high of RM3.08 reached on July 16. Its shares closed at RM2.20 yesterday, inching up 10 sen from RM2.10. The big question is whether the bad news has been already reflected in the stock price.


Written by Financial Daily