Reply To Notion's EPS Dilution Caused By Share Placements

Got the following reply on my posting Honey, My Notion's Earnings Per Share Has Shrunk!

• Shien Yang said...
  
  Hi there,the EPS is definitely going to get diluted this year. But u need to understand what the private placement is for. They need the money for the huge capex that they are going to incur this year for their capacity expansion.
  
  The result for all these money spent u will see it in FY11 when their net profit will jump again due to more than 3x increase in their production capacity for HDD parts.

Hello.

Regarding what the private placement is for... err.. well, I could actually write something like this ....

Let's have a look at recent events. ( Ok, I won't stretch it so far back.)

Let's look and assume that one bought Notion in mid Nov 2009. Why? Based on impressive earnings.

This was the earnings announced on 10th Nov 2009. Quarterly rpt on consolidated results for the financial period ended 30/9/2009

Notion then reported a sales revenue of 54.339 million and an earnings of 13.029 million. Previous quarter it made some 11.087 million only. An impressive jump in earnings.

Earnings then was based on 703.583 million shares.

In the very same month, Notion did a share consolidation. 5 into 1. Meaning the number of shares will be consolidated into 140.717 million shares.

Notion has 20.470 million in its cash balances and some 58.274 million in total loans.

The share placement of 10% was announced a month earlier. Announcement - Proposed Private Placement.pdf

Rationale of the placement explained in the pdf link above.

• NVB announced on 2 October 2009 that its wholly-owned subsidiary, Notion (Thailand) Co. Ltd has entered into an agreement to acquire a parcel of land with a factory located thereon. The proceeds from the Proposed Private Placement will be utilised for the extension of the existing factory, purchase of machinery and to defray expenses incidental to the Proposed Private Placement. The plant in Thailand is expected to commence operations during the 1st quarter of 2010.
  
  After due consideration of the various methods of fund raising, the Board is of the view that the Proposed Private Placement is currently the most appropriate method of fund-raising as it would enable the Company to raise the funds required which would otherwise have to be financed through bank borrowings thereby resulting in interest savings to NVB and its subsidiaries (“Group”).

And then on 19th Jan 2010. NOTION VTEC BERHAD (“NVB” or “Company”) Private placement of up to ten percent (10%) of the issued and paid-up share capital of the Company (“Private Placement”)

• HwangDBS Investment Bank Berhad, on behalf of the Board of Directors of NVB (“Board”), wishes to announce that the Private Placement has been completed with the listing of 13,844,694 new ordinary shares of RM0.50 each in NVB (“Placement Shares”) on the Main Market of Bursa Malaysia Securities Berhad on 18 January 2010. The Placement Shares were placed to Nikon Corporation (“Nikon”), which has a global standing in the manufacture and sale of camera-related products, such as digital cameras, as well as binoculars and other optical products for consumers, such as ophthalmic lenses.

Nikon Corporation was the buyer of the placement of shares.

The placement raised...

• The proceeds raised approximately RM33.78 million.

And the strange thing was ...

• The proceeds raised approximately RM33.78 million which will be used for the NVB Group’s expansion plans in Thailand which will add an extra floor space of 200,000 sq ft to the Group's facilities and defraying expenses incidental to the Private Placement. The Thailand plant will, in the initial stage, mainly cater for Nikon (Thailand) Co Ltd which has indicated that there will be more orders for the cam barrels and possible sub assemblies in the near future.

So Notion Vtec placed 10% shares to Nikon and the proceeds is then used in Notion's expansion plans in Thailand. This adds an extra floor space of 200,000 square feet. And this expansion caters for Nikon's orders.

Feb 2010, Notion announced this earnings. Quarterly rpt on consolidated results for the financial period ended 31/12/2009

On a q-q basis, sales increased from 54.339 million to 56.329 million. Net earnings improved from 13.029 million to 14.185 million.

Yesterday's earnings. Notion's sales were rather flat at 56.709 million. Net earnings slipped to 12.522 million.

The cash raised from Notion's placement to Nikon can be seen in Notion's cash balances indicating clearly that Notion had yet to deploy the proceed from its placement to Nikon. Which is understandable.

Now the rationale of the placement yesterday.

• The Placement Shares are intended to be placed out to long-term institutional investors and/or strategic investors and will enable NVB to raise gross proceeds of up to RM46.06 million (based on the indicative issue price per Placement Share of RM2.98) to fund future capital expenditure for its centralised 2.5” HDD baseplate manufacturing facility in Klang, working capital and to defray expenses incidental to the Proposals. The Board is of the view that the Proposed Private Placement is the most appropriate method of raising funds as the funds required would otherwise have to be financed through bank borrowings which would result in the NVB Group incurring interest cost.

So two placements. One to Nikon and another in the works.

How?

Now all that would have been extremely tedious and so long winded, yes? :D

So for your question on whether I do understand what the private placements for. Well I do understand and I did read Notion Vtec's explanation for the need of the placement of shares.

Frankly, IF I were a shareholder, I would have preferred a rights issue, where all the minority shareholders are given an EQUAL and FAIR chance to participate in the company's expansion program. Yes, if all the minority shareholders reckon that the expansion plans are justifiable, why aren't they given a chance to participate? Why exclude them?

And in certain cases, certain private placements have a history of being shady (not saying that this is case with Notion).

A share placement sale or a private placement excludes and it prevents the minority shareholder the chance to participate EQUALLY.

Yes, if I were asked to vote, I would always VOTE AGAINST private placements. (I do hope you understand that this is my flawed personal preference, ok?)

• They need the money for the huge capex that they are going to incur this year for their capacity expansion....
  
  The result for all these money spent u will see it in FY11 when their net profit will jump again due to more than 3x increase in their production capacity for HDD parts.

Now needless to say, since Notion claimed that all these money raised will be used for capex, surely one would imagine that the money spend should result in more net profit growth. That's the logical expectation and assumption. I have no problems with such reasoning.

However, let me stress that we are now looking at an increase of 29.270 million new shares, which works out to a 20.8% increase from the initial share base of 140.717 million.

And in my opinion, this is simply way too much in such a short time frame. January 2010, share base increase by 10%. Now Notion wants to increase by another 10%.

If one is a minority shareholder, what would one expect?

Which means, after these two share placements, Notion Vtec earnings has to increase by more than 20.8%, in order for the minority shareholders to see 'real growth' in their earnings per share.

Would this be possible?

Well those that really know me understand that I always feel that anything is possible.

So I let you be the judge and if you think the placement and the future prospects derived from the share placements is justifiable, do please buy more shares of Notion. :D

Who knows right? After all the plant expansions, Notions earnings could double or even triple, yes? That's a possibility yes?

But what if this does not happen? This is also a possibility, yes?

Me? Well I am only highlighting the issue of the dilution impact caused by these share placements. Whether the share goes up or down, it's beyond me. Really.