KUALA LUMPUR (Sept 5): Hong Leong Investment Bank (HLIB) has trimmed the valuation, and in turn its target price (TP), of Notion VTec Bhd (KL:NOTION), despite a decent set of earnings figures for the third quarter ended June 30, 2024 (3QFY2024).
The cut in TP to RM2.74 from RM3.28 is mainly because HLIB views Notion VTec to be among the companies hit by a stronger ringgit against the US dollar moving forward. The revision came after the stock plunged 57% from its recent peak.
HLIB maintained its earnings forecasts and its 'buy' recommendation, but lowered its valuation to a price-earnings ratio of 25 times, instead of 30 times previously.
“This adjustment reflects the subdued sentiment surrounding export-oriented companies, impacted by the sharp appreciation of the ringgit against the US dollar. Despite this, we remain positive on Notion VTec’s impressive turnaround and its strong earnings growth trajectory.
“The company is well positioned to capitalise on increasing adoption of artificial intelligence (AI), advancements in disk storage capacity, global manufacturing diversification, and revival of the electrical and electronics sector,” stated HLIB.
In the latest research note, HLIB pointed out that the manufacturer has a large exposure to foreign currency risks, as 50% of Notion VTec's receivables are in the US dollar and 20% in the euro, while 90% of its sales are denominated in these currencies.
Besides the appreciation of the ringgit, HLIB cited the imposition of cash upfront requirements by brokers on buying Notion VTec shares, which had dampened sentiment, as one of the reasons for the share price fall.
Notion VTec’s share price has more than halved to RM1.05 from its 52-week high of RM2.45.
“Additionally, the overall weakness in the mid- and small-cap space following the 'Black Monday' selldown, coupled with the investment community's shift towards value plays — evidenced by the recent surge in the financial services sector — has triggered further selldown in high-beta counters like Notion VTec,” it added.
HLIB commented that Notion VTec faces foreign exchange losses on its receivables, and gross profit margins will suffer as a stronger ringgit reduces the absolute value of earnings for the same products sold.
The company’s earnings will further be weighed by its aluminium inventory that was bought during the strong US dollar period, it added.
HLIB expects the impact of a stronger ringgit to be fully reflected in Notion VTec's earnings performance next quarter.
Notion VTec currently plans to counter the impact by forwarding contracts and may adjust its product average selling prices upward, HLIB wrote in its research note.
Latest results show decent growth
In the report, HLIB highlighted Notion VTec’s strong operations and growth in the latest quarter.
For one, the hard disk drive (HDD) segment saw a growth of 39% year-to-date, with its largest HDD customer’s order allocation rising to 70-80% from under 50%, after a competitor faced quality issues. HDD demand is boosted by the adoption of generative AI and looks to face continuous growth driven by both existing and emerging technology.
In the next two months, Notion VTec plans to increase its production capacity from 17 million to 20 million spacers per month by upgrading and increasing its nickel plating lines, with aims to double capacity to 40 million spacers by the second half ending Sept 30, 2025 (2HFY2025).
Notably, the group has also begun receiving customer inquiries for glass and stainless steel spacers, with samples already dispatched for evaluation.
Meanwhile, the electronic management services segment saw large growth in the cumulative nine-month period ended June 30, 2024 (9MFY2024) at 81%, driven by tension bar orders.
The group is currently increasing production to 60,000 pieces per week, with the goal of reaching 100,000-200,000 pieces weekly.
The automotive segment, on the other hand, had a rather steady performance of 16% growth in 9MFY2024. Orders are expected to increase as its largest customer looks to move away from China.