Update On Notion VTec.

Simple quesion.

Is Notion capex via share placement justifiable?

I will not use my reasoning but I would explore and attempt to interpret the comments made by our local pros after their analyst meeting with Notion's management.

Here are some comments from RHB.

• Forecasts. While we are positive on Notion’s long-term earnings outlook, we are maintaining our forecasts for now. Management warned that there is some risk that capacity ramp-up and product testing costs for its 2.5” base plate and spindle motor lines could dampen earnings in the next two quarters. Nevertheless, longer term, we believe there is potential upside to our FY11-12 forecasts arising from: 1) stronger-than-expected sales of spindle motor hubs and 2.5’’ base plates; 2) stronger contribution from its Thailand and Klang operations, capitalising on the rapid expansion of key customers, Alphana Tech and Samsung; and 3) Higher contribution from the auto segment.
  
  ♦ Investment case. We maintain our indicative fair value of RM4.64 based on a target FY09/11 PER for now although we note that after adjusting for the potential dilution arising from the proposed 10% private placement and 1-for-5 rights issue of free warrants, our fair value would fall to RM3.87.
  
  Nevertheless this would still imply 22.1% upside. Maintain Outperform.

RHB are positive on the long term outlook, yeah they understand that ther managment had warned on future profits BUT nevertheless they are maintaining their earnings forecasts on Notion.

And when one adds in the potential dilutions, RHB's fair value for Notion would fall by 16.6% to rm 3.87.

RHB's 2011 net earnings forecast for Notion is 56 million.

From Kenanga Research:

• Tweaking our FY10 numbers with net 6.6% lower factoring higher depreciation and interest charges on the back of higher than guided capital expenditure. FY11 revenue is revised up 19% on assumed 1.9m monthly run rate for base plates but net is only up 2.4% due to skew towards lower margin HDD components. Taking into account possible 15.5m new shares from the coming placement exercise, new EPS of 36.4sen is derived. Applying a 10x multiple to FY11F will yield a new target price of RM3.64 (RM3.84 previously). Our numbers carry upside risk should management ramp up guidance of 5m pieces / m onth is achieved for FY11. We continue to like the group for its strong execution track record and opportunistic move to capture a larger HDD market share. Current weakness on possible arbitraging from the coming placement exercise represent good buying opportunity. BUY maintained.

So Kenanga is optimistic but as optimistic as they are, the net earnings expectations for FY10 is lowered by 6.6% and fy11 is only revised up by 2.4%.

End result? Target price is lowered to rm 3.64.

Kenanga's 2011 net earnings forecast for Notion is 62 million.

CIMB Research:

• The key takeaways from Notion’s 2QFY9/10 results briefing were i) its robust FY11 guidance, ii) confirmation of the Alphana contract, iii) more clarity on its proposed corporate exercises, iv) the clearing up of the quality issue and) the increase in its capex and debt guidance. The positive surprise was the significantly higher FY11 guidance and new camera revenue while the negative surprise was the higher capex and borrowings associated with it. The net effect of higher earnings for the Alphana contract and the increase in the share base from the placement and warrants issue is a 1% increase to a 13% decline in our EPS forecasts for FY10-FY12. Our target price falls from RM4.46 to RM4.05, still based on a 20% P/E discount to its peers or 9.3x CY11 P/E but now pegged to the fully enlarged share base. We retain our OUTPERFORM recommendation in view of the catalysts of i) new customers, ii) production of higher value-added parts, iii) strong earnings contribution from Factory 3, and iv) supply of more components to a wider audience.

A 13% decline in EPS forecast. Target price is adjusted to rm4.05.

CIMB's 2011 net earnings forecast for Notion is 80.8 million.

And here comes the champion.... OSK. :P

• Tweaking up FY11 earnings. Based on management’s FY11 revenue guidance for 2.5” HDD base plates of RM228m and assuming a 12% net profit margin from this particular program as well as 25% organic FY11 earnings growth from its existing business, we are increasing our FY11 earnings forecast by 12%. For the 2.5” HDD business, we have assumed a low 12% net profit margin in case Notion experiences high yield loss in the course of manufacturing these new components and to factor in the initial start-up losses for the third factory. Having said that, the start-up losses could be potentially mitigated by lower plating costs in FY11.
  
  32% dilution from corporate exercises. Based on our estimates, Notion’s FY11 net profit is expected to soar by 71% in FY11 on an expected 54.3% earnings growth in FY10. However, its FY11 EPS growth is estimated at 18% on factoring in a maximum 49.4m shares to be issued from the proposed private placement exercise and free warrants issue.

Huhuhu... Notion’s FY11 net profit is expected to soar by 71% in FY11 on an expected 54.3% earnings growth in FY10.

So target price is increased from 3.55 to 3.88!

ps: in the posting Honey, My Notion's Earnings Per Share Has Shrunk! one would have noted that I said OSK Target price for Notion was 3.38. Yes that is correct. On April 30th, after Notion released its earnings, OSK increased its target price from rm 3.38 to rm 3.55. (maybe they saw it looked strange and maybe they saw my remarks "( err... target price is 3.38, Notion was trading at 3.26. - seriously wonder how on earth they can call it a buy with the target price a mere 12 sen or a mere 4% upside. But then.. what can I expect.. it's OSK! LOL!)

See this is not about me picking on OSK. LOL! But only they can make such upgrades. On 30th April 2010, they upgraded Notion from 3.38 to rm 3.55. On 3rd May, or the next trading day, OSK upgrade Notion again to rm 3.88!!! Upgrades are so easy, huh? :P

OSK's 2011 net earnings forecast for Notion is 95.0 million.

So how?

Let's chuck OSK's report to the other side and look at the comments made by RHB, CIMB and Kenanga. All their target prices are revised lower, no thanks to the dilutions in earnings per share.

How?

Did the share placements helped?

And if the share placements are good, why are the target prices lowered?

On the other hand, what if a rights issue was made instead of the placements?

Would that not be a better option?