This article first appeared in The Edge Financial Daily on May 2, 2017 - May 8, 2017

KUALA LUMPUR: Notion VTec Bhd’s share price has more than doubled since the beginning of the year. While some may question whether the hike is justifiable, the company has come under the spotlight as it embarks on an expansion spree.

The manufacturer of precision parts for hard disk drives (HDDs), the automotive industry and cameras is riding on a rise in demand for automotive electronic brake system (EBS) components.

“The company will be adding 50 computer numerical control (CNC) machines in the current financial year ending Sept 30, 2017 (FY17), and another 50 CNC machines in FY18 to cater for our growth,” executive chairman Thoo Chow Fah told The Edge Financial Daily in a recent interview.

The investment is about RM30 million in total and will be funded via the proceeds from the recently completed private placement by the company.

“Currently, we have some 40 CNC machines installed. We may bring in [the new machines] faster if we can,” Thoo said, adding that some of the existing machines are being rejigged for a better product mix.

All the new machines will be installed in the company’s factory in Klang. The group currently operates three production facilities in Klang and Johor, as well as a manufacturing outfit in Ayutthaya, Thailand.

Thoo said the impact of the expansion will only be fully felt from FY18.

Nevertheless, it should be noted that Notions VTec’s first quarter of FY17 (1QFY17) net profit already surpassed the full-year net profit for FY16 totalling RM5.68 million.

The 1QFY17 net profit of RM6.44 million was more than double the RM3.11 million reported in 1QFY16. Revenue rose 11.52% to RM68.08 million from RM61.05 million, due to growth in all segments and a stronger US dollar.

Kenanga Research, in a note issued after the results were released two months ago, said the higher earnings were driven by a better product mix, better utilisation of CNC machining and the absence of settlement for adverse currency hedging of a low base in 1QFY16.

“Our results were principally driven by the automotive segment,” said Thoo. “Moving forward, we see increased orders for the EBS. We expect a growth of about 30% [in demand] for this segment this year. Next year, it will be equally strong.”

Thoo said the automotive segment is more stable than the other segments. “The segment has a high barrier of entry. When it comes to safety-related components, automotive parts makers are very careful. We have a proven track record,” he said.

“Our auto parts clients are getting larger market share, and at the same time, we are getting more allocations from them,” he added.

Overall, Thoo said, FY17 will be better than FY16, supported by a robust growth in automotive EBS components and the HDD segment.

He said demand for HDDs remains strong despite competition from solid-state drives (SSDs).

“Surprisingly, there was growth in [the] HDD segment. Quarter-on-quarter, we saw [a] 20% growth for some HDD components,” he said.

Notion VTec manufactures HDD core components, such as antidiscs, disk clamps and spacers, as well as offers value-added works on baseplates.

“Due to a shortage of flash memory, SSD supply was affected and the price has gone up, making HDDs more attractive in the short term. I don’t know how long it (increase in sales of HDDs) can last. But HDD makers are moving into [the] enterprise segment,” said Thoo.

Thoo said HDD makers are also coming out with better technology to confront SSDs, such as shingled magnetic recording and heat-assisted magnetic recording, to make HDDs relevant and competitive.

For FY17, Thoo expects the HDD segment to account for 40% of its total revenue, while engineering products will contribute 30% and engineered products another 30%.

Moving into FY18, the ratio is expected to be 30%, 40% and 30%, Thoo said, adding that the company will look into consumer products and the aerospace industry, which is under the engineered products segment, to get better margins.

The engineered products segment is dominated by camera components, for which demand remains despite a fall in numbers over the years.

“The quality of camera phones is getting better these days. But for professional photographers, you will still need cameras for special effects and so on,” he pointed out.

Thoo also spoke about Notion VTec’s foreign exchange (forex) policy. Pointing out that the company’s products are mainly transacted in US dollars and euro, he said: “We made some mistakes in the past [in forex]. We are now very careful. We are now totally unhedged as the US dollar is strong.”

Notion VTec has been hit by a series of unfortunate events over the last five years, including a major flood at its Thailand facility in 2012, a fire at its Klang production plant in 2013, losses from non-core investments in 2014, and losses from currency-related derivatives exposure in 2015 and 2016.

“All these are set to come to an end as the company has managed to recover dues from insurance claims and clean up its books by writing off non-core investments, as well as settling all its derivatives exposure,” RHB Research Institute wrote in a note earlier this year.

Due to a failed venture into the silver mining business, the company impaired RM15 million for the investment.

Thoo, who recently ceased to be a substantial shareholder of Notion VTec, said the company has learnt its lesson, and will focus on its core business moving forward.

He now owns a 4.349% direct stake and a 0.313% indirect interest in the company.

Kenanga Research, the only research house covering the counter, has an “outperform” call for Notion VTec, with a fully diluted target price of RM1.58.

Last Friday, the stock closed unchanged at RM1.19, with a market capitalisation of RM368.2 million.