Our POSITIVE conviction is reaffirmed as a meeting with management shed more lights on its strategies anchoring superior earnings prospect from low base. More importantly, the group will also start FY17 with a clean slate. We upgrade our FY17E earnings to RM20.7m to account for higher orders and better margins from better product mixes and operational leveraging. It is still trading at undemanding PER and PBV valuations, which offer a very good entry level along with decent dividend yields of 4.8-6.3%. Maintain OP with a higher TP of RM0.85.

4Q16 already showed signs of improvement. Recall that NOTION closed the year with a core NP of RM2.6m, reversing from 9M16 core losses, which beat our expectation. With the improving prospect in sight, we have previously altered our conservative view by advocating an OUTPERFORM call with a very conservative TP of RM0.44, based on 0.4x FY17E PBV. Now to our positive surprise, an interim tax-exempt dividend of 1.0 sen was also declared few days ago, on top of the net DPS of 1.0 sen declared during the results release back then, bringing its FY16 dividend yield to 3.2%. We lauded the move as this showcased management’s commitment in rewarding its investors with better prospect in sight.

Better products portfolio to anchor growth. With more details being shared during the meeting, we were UPBEAT to gather that the group is getting more stack-up orders for the Automotive EBS components from its new customer. In terms of volume, it will be >30% more which will counterbalance the demand fluctuations for Interchangeable Lens Type products in its Camera segment. Note that the group has been slowly freeing up its capacity in the Camera segment to cater for these better margins and higher resiliency products. The 4Q16 product mix for HDD/Camera/Auto was 49%:21%:30% and the group is aiming to reach the ideal mix of 35%:15%:35% by 2018. On top of that, the group has also ventured into the new Industrial segment - manufacturing parts for household/sport items. Although meaningful contribution will only be seen in FY18, we lauded the move as the added portfolio will smoothen the cyclical nature of its earnings and products cycle.

Enhanced operational efficiency with new CNC machines up and running. On its new Johor operations, management noted that 50 new CNC machines will be fully installed by April 2017, which will see better operational efficiency in terms of processes, machine cycle time as well as costs. In the blue-sky scenario, management believe that savings of RM2.4m per annum could be achieved, with less 100 workers, alongside with 3x faster lead time for processes. All in, the capex in FY17 is expected to be c.RM30m.

Improving balance sheet with strong net cash position in FY17. As of end of Nov 2016, the group is already at a strong net cash position of RM21.7m. Note that the group has declared a total of 2.0 sen dividend, which is equivalent to RM5.3m for FY16. Following its earnings recovery as well as improving balance sheet, management has noted its intention to reward its shareholders with higher dividend pay-out in FY17. With our FY17 earnings estimates and with healthy free cash flow projection of RM15.8m, we believe that the group could offer at least 3.0 sen (based on a DPR of c.39% or total RM8.0m), translating into a dividend yield of 4.8%, which appeal to investors who are seeking refuge in defensiveness.

Maintain OUTPERFORM with a higher TP of RM0.85 (from RM0.43). Post meeting, we increased our FY17E NP to RM20.7m, to account for the absence of adverse currency hedging as well as higher orders and better margins from improving product mixes and better operational leveraging. Note that we have also introduced our FY18E NP of RM26.3m, implying growth of +27%. With earnings recovery in sight, we switch our conservative PBV valuation to 11.0x FY17E PER, leading to a higher TP of RM0.85 (from RM0.43). (Please refer to the overleaf page for other details)

Source: Kenanga Research - 11 Jan 2017