According to OSK Research, by having as its customers the biggest names in the HDD and digital camera industries – the likes of Western Digital, Hitachi and Nikon – Notion VTec’s business will likely mirror the performance of the two industries. Independent research has shown that demand for HDD will continue to rise in 2010 after experiencing its first contraction in sales in 2009 following many years of growth. Shipment of digital cameras, meanwhile, is also expected to be flat or to drop slightly for the first time in 2009 due to the global economic recession after a period of growth from at least 2003, but is also expected to resume growth in 2010. Digital camera shipments in 2010 are expected to increase by 3%.
A possible excitement is that the company has secured a new HDD customer in Samsung where Notion VTec has been qualified by the former to produce 2.5-inch HDD components. According to OSK Research, this is one key additional factor that will propel Notion VTec to a higher growth platform in FY10 and FYil. Without this qualification, the company would only at best grow organically in tandem with the industry’s growth rate, it says. The qualification by Samsung actually allows Notion VTec to mass? produce 2.5-inch HDD components for the FY1Of first time since before this project, 90% of its HDD components were only for the 3.5-inch HDD segment.
Depending on worldwide market demand, Notion VTec could be making 500,000 pieces a month for Samsung. However, OSK Research believes that should the company execute this project smoothly, there is a possibility that the volume could go up to one million pieces per month by mid-2010. Hence, this new production could be a significant earnings kicker going forward for the company.
OSK Research is enthusiastic about the company’s prospects, noting that Notion Vtec is now on track for its eighth straight year of growth with management having shown its capability in managing volatile raw material prices and exchange rates over the years to deliver solid earnings growth and earnings margin for the company. With the recovery in the world economy, shipments of HDD and digital cameras are expected to resume steady growth going forward after an interruption in 2009, and together with the Samsung qualification kicker, the research house expects Notion Vtec to post even stronger earnings growth in FY10.
By applying a fair 9.0x FY10 price earnings (PE) multiple to the company’s projected earnings, OSK Research values Notion Vtec at a fair value of RM0.585. However, it notes that the valuation is a peak cycle valuation of the PER trading band for the stock and hence the valuation does hinge on the optimism level in the equity market. The stock price has risen rapidly in the last few weeks and hence investors could probably wait for a pullback to accumulate at lower levels if they like the growth story of the company.