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.