Saturday, August 04, 2007

Notion Vtec

My Dearest Newbie,


  • I would like to seek your second opinion on Notion Vtec as this stock is currently trade at RM0.45 which i would think it's strongly under-valued. I realized the recent sell-off by it's major shareholder and directors was due to complying listing rules, would this cause the temporary down-trend? Although it's listing history is only two years but the fast growth was impressive, together with the healthy financial status.

Regarding shareholders transactions. Let me repeat what I had mentioned the other day.

  • In my opinion, tracking shareholding transactions is one of the most complex things an investor could do.

    I for one could not make heads or tails in most transactions.

    Are the shareholders right or are they wrong in each of their purchase/disposal transactions?

    Me? I always have no idea.

    Could never make any consistent intelligent decisions in such matters.

Regarding its earnings.

Here is an extremely simplistic Notion Vtec earnings track record. At this moment of time, Bursa website is down, hence I can get no verification of the numbers posted and also I cannot go much more in details. However, gauging from what you have written, I am assu-u-ming that you are interested in Notion due to its earnings growth.

And as can be seen from the earnings table above, the current trailing twelve months earnings (TTM) showed that Notion earned a whopping 29.299 million for the last 12 months, which gives a solid indication that fiscal 2007 will simply be grand for Notion. (Do note, I am discounting the quality of these reported earnings since the Bursa website is down)

Anyway, ass-u-ming a rough estimate earnings of some 32 million for Notion, and with a share based of some 586 million, this translates to an eps of 5.5 sen.

Now if you use the stock price reference of 45 sen, it would appear that Notion is selling at an awfully cheap valuation in the stock market given the current track record (the spectacular earnings growth) of what Notion has achieved since listing and more so given Notion extremely healthy earnings margin. (ps. again this is too simplistic for the assumption is that Notion earnings growth can be maintained!)


Possible events to note.

Notion has YET to comply with the 30% Bumiputera Equity Condition. Out of memory, if not mistaken, Notion had already been granted an extension and has to comply with this ruling before the end of this year. Meaning Notion has to place out 30% new shares to Bumiputera investors.

Couple of things comes to mind and the most obvious one is that given the quality of Notion's track record, why is this an issue? Surely selling 30% new shares to new investors would be easy, right? Why the difficulties? No takers? And for what reason the lack of interest? Is there something wrong with the company orr perhaps the company simply does not know how to market themselves in the equity market? How? Sorry but I do not have any answers.

Next is the most important issue is the dilution effect caused by this placement of new shares. 30% is heck a lot.

Here is why.

Using the earlier assumption of 32 million earnings eastimate, one is looking at Notion with an eps of 5.5 sen. With these new placements, Notion share base will explode to some 760 million shares. Which means Notion EPS will dilute or shrink to only 4.2 sen.

Taking this issue into perspective, say if one is a prospective investor now, should one buy at 45 sen?

Without the dilution of placement shares, Notion is trading at 8.1x fy 2007e earnings multple.

With the dilution of the new shares, Notion would be trading at 10.7x earnings multiple.

How?

Is this issue acceptable or not?

Hope these second opinions help.

9 comments:

newbie said...

Dear Moola,

Thanks for your second opinion. Btw, i would like to ask, if it were to comply the listing rules, would it necessary to come up with 30% new shares for bumi? Because this seems very very unfair isn't it? (forgive about my limited knowledge) I thought they can sell off their shares to bumi to reach this %?

Thanks again.

newbie said...

Dear Moola,

This is what i have collected:

0083
Changes in Director's Interest (S135)

Particulars of Director 37

Name : Lee Tian Yoke
NRIC/Passport No./Company No. :
Nationality/Country of Incorporation :

Address:
No. 76, Jalan Nyaman 1, Taman Bukit Indah, 58200 Kuala Lumpur, Wilayah
Persekutuan

Descriptions (Class and Nominal Value):
Ordinary Shares of RM0.10 each


Name and Address of Registered Holder:



Details of Changes

Date of Notice : 19/07/2007

Transactions:
No. Date Transaction Type No of Shares Price (RM)
1. 19/07/2007 Disposed 2,000,000 -


Circumstances by reason of which change has occurred:
Disposal of shares to bumiputera investor to comply with NEP requirement.

Nature of Interest:
Direct

Consideration:
RM0.50 per share


No of Shares Held After Changes:
Direct : 29,598,110 shares (5.0500%)
Indirect/Deemed Interest : 0 shares (0.0000%)
Total : 29,598,110 shares

Remarks:
N/A


I looked at the past transaction and besides the disposed of shares from "Koperasi Permodalan Felda Berhad", all disposed made from directors were due to complying of rules. Is the information useful?

Regards,
newbie

PJ-investor said...

Hi moola,
i appreciate if you could produce the research to compare to DUFU, which has the same business model with Notion. Then we can compare it apple to apple. About the 30% bumi, if the financial data is firm enough, that kind of dilution is not much a problem. Plus, if there is research on their future earnings, compare to DUFU, i opine we could reach to the conclusion.

PJ-Investor

Moola said...

My Dearest Newbie,

Yes, i do not think highly of these placements.

My Dearest PJ-investor,

Quote: i appreciate if you could produce the research to compare to DUFU, which has the same business model with Notion. Then we can compare it apple to apple. About the 30% bumi, if the financial data is firm enough, that kind of dilution is not much a problem. Plus, if there is research on their future earnings, compare to DUFU, i opine we could reach to the conclusion.

Reply: I have blogged about Dufu before.

http://whereiszemoola.blogspot.com/2007/05/update-on-dufu.html

and

http://whereiszemoola.blogspot.com/2007/03/regarding-dufu.html

And on the issues of comparing Apples? I guess we are talking about apples and oranges here.

rgds

Moola said...

My Dearest PJ_investor,

Quote: About the 30% bumi, if the financial data is firm enough, that kind of dilution is not much a problem.

Reply: To say that this dilution is not a problem is saying that Notion earnings is expected to grow another 30% the next fiscal year.

Notion's earnings fy 2007 earnings is expected to be around 32 million. And for its fy 2008, one is expecting Notion earnings to grow by 30% to 42 million.

Is that possible?

Maybe and maybe not.

However, the idea of Notion earnings to grow by 30% to negate this dilution of earnings caused by this placement issue, is probably not too seducing to many investors.

rgds

random said...

Dear Moola,

Since Dufu is a direct competitor to Notion, are we not comparing apples?

Moola said...

Random,

Quote: Since Dufu is a direct competitor to Notion, are we not comparing apples?

Reply: Perhaps, you should have a read on those two blog postings on Dufu.

Yes, they might be in same business industry but Dufu simply pales in comparison.

This is like saying apples and oranges are fruits. However, are they the same?

random said...

Dear Moola,

Reply: Perhaps, you should have a read on those two blog postings on Dufu.

Yes, they might be in same business industry but Dufu simply pales in comparison.

LOL

I did read your postings, perhaps a better analogy would be we are comparing a ripe and sweet apple (Notion) with an unripe and sour one (Dufu)

As for the unripe apple, will it turn out sweet or sour, only time will tell...

Alvan said...

Recently, if you read the announcement properly, Notion's major shareholders sold off portion of their shares to comply with with NEP requirement (i.e. 30% bumiputra spread). So, they are not diposing it because of the change in prospect or fundamental. Furthermore, there is no new share issued, so there is no dilution of share value. Correct me if I am wrong.