Private equity eyes Notion again?

Market talk of possible corporate exercises has resurfaced at Notion VTec Bhd. The rumours include the potential entry of a major US-based private equity firm into the company and Nikon Corp, a current strategic shareholder in Notion, considering upping its stake in the hard disk drive (HDD) components and camera parts manufacturer.

A source said talk of a private equity firm’s entry was not new, but Notion’s board was believed to have been negotiating for a higher price before it would table any proposal to shareholders. He told The Edge Financial Daily that the private equity firm was valuing Notion at about 1.7 times its book. Notion’s net tangible assets (NTA) per share stood at RM1.55 per share as at Dec 31, 2010.

Based on Notion’s last traded price of RM2.16 on Friday and FY10 numbers, it was trading at 1.39 times price-to-book. However, it was understood that not too long ago, Notion’s management had rejected an offer, which was only slightly higher than the present one, on the grounds that it was too low.

Notion’s share price hit a high of RM3.45 in March last year before tumbling to a low of RM1.52 in September on fears of a downturn in the HDD industry.

Shares in Notion and its local competitors, JCY International Bhd and Dufu Technology Corp Bhd, have rallied strongly since mid-March 2011 on expectations of a recovery for the HDD sector. JCY led the gainers with a 40% surge in its share price since mid-March, when it rose from 57.5 sen to 80.5 sen last Friday.
In the same period, Notion’s shares rose 28.6% from RM1.68 to RM2.16.  

Outside Malaysia, HDD manufacturers have seen some consolidation and privatisation attempts. Most recently, TPG Capital met with Seagate Technology plc, although privatisation talks ended as the former had reportedly failed to find partners to raise enough financing.

Western Digital Corp, meanwhile, had proposed to pay US$4.3 billion (RM12.9 billion) for Hitachi Global Storage Technologies, which holds Hitachi Ltd’s HDD operations, early last month.

Analysts said the move would remove excess capacity while containing a price war. Indeed, since the merger was announced, shares in Western Digital, Seagate and Malaysian listed component players have all risen sharply, indicating expectations that the merger is positive for the industry. 

The increased speculation on Notion being a target comes on the back of the series of disasters that had hit Japan’s northeastern coast, which the source said has enhanced Notion’s attractiveness given the potential of further upside as other electronics manufacturers were impacted.

In addition to damage to some facilities and electricity rationing, the quakes and tsunami also caused disruptions to a few Nikon plants and manufacturing subsidiaries located in the prefectures of Miyagi, Tochigi and Ibaraki, according to Nikon’s website.

As at March 30, Nikon’s plant and seven manufacturing subsidiaries had resumed operations, it said. Nikon, however, added that on the back of concerns it would not be able to cope with the demand from its customers, exacerbated by electricity rationing, the company would take measures to collaborate with its business partners.

In light of the latest 7.4 magnitude earthquake that struck last Thursday, more recent updates on Nikon’s operations have not yet been made available. Nikon had bought a 10% stake in Notion last January for RM33.78 million or RM2.44 a share via a private placement.

Towards the end of March this year, Notion said its third factory in Klang would be supplied with raw materials from Nikon for the production of camera body mounts effective immediately, adding that it expected the new business to contribute up to RM60 million in sales per year.

According to a note from ECM Libra Research, the factory in Klang is currently under-utilised and has 190,000 sq ft of built-up space with cleanroom facilities and was originally meant for the production of 2.5-inch HDD base plates, although it could be made available immediately for machining works.

The analyst said Notion would be able to cope with the manufacturing of both camera body mounts as well as the 2.5-inch base plates as its present capacity of 250,000 units per month was still well under its full estimated capacity of seven million.

According to Notion’s 2010 annual report, HDD and single-lens reflex (SLR) camera parts made up 44% of the company’s product mix revenue for the year, while automotive/industrial parts made up the remaining 12%.

“We expect the product mix to skew towards the SLR camera segment as orders for new models begin to materialise in FY11,” said executive chairman Thoo Chow Fah in his statement to shareholders.

The move to focus less on HDDs could augur well for Notion, which saw demand weaken late last year, compounded by resurfacing arguments in favour of solid-state drives (SDDs) as the popularity of flash-memory storage devices like Apple’s iPad rose. The camera division also yields significantly higher margins.

A report from HwangDBS Vickers Research earlier this year highlighted Notion’s attractiveness as a potential merger and acquisition (M&A) target as it has exposure to both the camera and HDD business.

It had noted that based on past M&A deals for HDD makers, acquisitions took place between two and five times price-to-book value (PBV).

“Assuming a PBV of three times, given Notion’s superior margins, this implies a market cap of RM724 million, or RM4.50 per share,” it said.

For its 1QFY11 ended Dec 31, 2010, Notion reported net profit of RM13.4 million on revenue of RM59.98 million. Earnings per share for the period was 8.79 sen.

For FY10 ended Sept 30, Notion posted higher year-on-year net profit of RM37.43 million on revenue of RM226.84 million, compared with net profit of RM35.90 million on revenue of RM172.71 million previously.

Another noteworthy development is whether Notion would receive MSC status, which would apply to selected technology-related products under the Investment Tax Allowance system.

HwangDBS Vickers Research estimated that being granted the status could potentially save Notion up to RM10 million per year in taxes for up to five years, which it said the company could use to pare down debts or increase dividend payout.

Notion is under coverage by seven research houses, of which four have a “buy” recommendation on the stock, while the other three have “neutral” calls. - by Melody Song  of theedgemalaysia.com