This article first appeared in The Edge Malaysia Weekly, on October 26 - November 1, 2015.

Notion VTec Bhd has been trading near multi-year lows, thanks to its unexciting financial performance. And in what seems like an untimely move, executive chairman Thoo Chow Fah is selling his shares on the open market and has ceased to be a substantial shareholder.

Thoo, one of the co-founders, started paring his stake in Notion VTec a month ago, from 7.67% to 4.431% on Oct 16. Since then, he has sold 12.05 million shares, almost halving his holding to 11.88 million shares.

His share sales do not send out a positive sign to the investing community, especially since Notion VTec (fundamental: 1.15; valuation: 0.90) slipped into the red in the last financial year ended Sept 30, 2014 (FY2014).

Although no transaction prices were disclosed on Bursa Malaysia, Thoo would not have gained much from the open market trades.

Notion VTec’s share price is fast approaching a five-year low of 34 sen, recorded on Dec 16 last year. The stock closed at 38 sen last Thursday, 5% down from what it was trading at when Thoo began to sell his shares on Sept 22. 

When contacted by The Edge, Thoo says he needs funds for personal reasons. He is buying a house in Australia.

“My exit will only be short term. I will come back at some point when I have the money. It may not be the most conducive time but I have no choice. I have other businesses to take care of too,” he adds.

Thoo doesn’t believe that his stake sale will affect shareholder sentiment either, saying, “I don’t think other shareholders will follow me. They have been acting quite independently of me.”

But, realistically, what’s left in Notion VTec to keep shareholders invested?

Thoo stresses that the management is working hard to stop the red ink from spreading. However, he acknowledges that the weak consumer sentiment and the harsh global economic conditions will pose challenges to Notion VTec. 

While the company had anticipated a profitable FY2016, Thoo says it is becoming increasingly difficult to predict when the hard disk drive (HDD) maker will return to the black.

“Currencies and economic conditions globally have been volatile in recent years, so it is tough to say for certain when we will see a turnaround,” he says.

“Volatility is higher than normal and the world has become very dependent on China. As they say, when China sneezes the world catches a cold. So, with the uncertainty of the Chinese economy, it makes it very difficult to predict.”

The export-oriented company is vulnerable to global economic conditions, but it should also benefit from the sharp depreciation of the ringgit against the US dollar.

Nonetheless, luck has not seemed to be on its side in the past few years or so. It was hit by the massive flooding in Thailand in 2011. Later, its factory caught fire. A few of its diversification programmes did not turn out well. 

And now, although average selling prices have risen and boosted its revenue, Notion VTec was hit by foreign exchange losses as its forward hedges were at a lower rate.

For its nine-month period ended June 30, 2015 (9MFY15), Notion VTec recorded a foreign exchange loss of RM30 million which ate into its earnings. The RM8.9 million one-off gain from the sale of an industrial property in Klang managed to reduce its net loss to RM2.51 million for the nine-month period from RM16.12 million in the previous corresponding period. The company’s revenue grew 28% to RM184.28 million.

“We are still looking at the asset-light strategy and will consider further disposals on a sale-and-lease back model when the market permits,” the company says in its notes to the financial statement, indicating that there may in future be more one-off items providing a buffer to its earnings.

Notion VTec’s HDD segment has shrunk from about 50% to equal parts now with its camera and automotive segments.

For FY2014, Notion VTec recorded a net loss of RM27.74 million, compared with a net profit of RM20.09 million in FY2013. Revenue shrank 12.8% year on year to RM193.94 million in FY2014 from RM222.32 million in the previous financial year.

The company says only the automotive segment was stable, thanks to constant orders from European customers. The HDD and camera segments, however, saw stiff competition from tablets, smartphones and better quality cameras on mobile phones in general.

Notion VTec’s financials further bore the mark of an unsuccessful investment in silver mining in Australia through Alcyone Resources Ltd. It incurred a RM9.8 million impairment in FY2014 as the mining firm went into receivership.

When Notion VTec first began this venture in October 2013, it had intended to ride its turnaround story.

Similarly, the company has also aborted its diversification into the smartphone business, dropping plans to launch its own brand  — Trendi — in May.

In the latest notes to its financial statements, it says, “The group has decided it is too tough for a new brand to be established, especially with the high inventory held by HTC and even Samsung. Demand will be slowing down, making it a cut-throat environment.”  For that, it registered a small investment loss of RM500,000.

“The HDD segment is going to be tough and we cannot rely on that so much anymore. We have to reinvent ourselves and look at other industries, and that is why we are looking at venture capital now,” Thoo says.

He adds that the company will set aside funds to invest in or partner technology start-ups that could be synergistic to its existing businesses. “We won’t restrict ourselves to Malaysia so we are looking at regional start-ups as well.” 

Only time will tell if this new venture will bring Notion VTec the turnaround it needs.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.