Notion VTec

First off, I was first introduced to Notion Vtec when I read an article by Insider Asia from Edge Malaysia Online. They did and some coverage on the stock they bought and tracked it's performance on a weekly basis as part of their portfolio watch.

I've had the habit of scrutinizing a counter if someone claims it is good and excellent, to see if it suits me. Though not exactly in-depth or anything when I do it as I merely screen them from financial summaries. Just to keep myself updated and quick on info links and such. One of the most important thing an investor should have is his ability to find information on his investments or in this case, his future investment. At least in my opinion anyway. With the internet, the is no such thing as enough good information, more like too much dis-information to screen.


Business Prospects

I was quite surprised when I was reading the Notes 'B3' that came with the latest quarterly results when management actually gave a projection of how the year end results will look like. Now this was released in August.

Quote;
"Based on nine months results and visibility of orders, management targets the FYE2009 revenue to be approximately RM165 million and EPS between 4.8 and 5.0 sens. It is assumed that there will be no major change in exchange rates, raw materials prices and other cost of productions."

So basically management tells us that, it'll look like that when the last quarter results comes out. Take note also that this was in August when the latest accumulated EPS was only 3.26 sens and share prices was less than RM0.40 a piece. And when the quarterly results was released, the prices appreciated strongly and now sits pretty at 50 sens. Not bad huh for cheap publicity.


Still though, it's one thing of management to say something and another of how things will turn out to be. But based on that statement, Notion will go ahead with it's expansion plan into Thailand buying a new factory and setting up another manufacturing plant for HDD components. Recently they announced a proposal for private placement to get a cash infusion for their Thailand start-up.

Bulk of their customers are HDD makers like Western Digital and more recently Samsung. Their camera parts for SLR production serves mainly Nikon. Part of the reason of the Thai expansion was to have a manufacturing plant closer to Nikon camera factories which have bases in Thailand. It is seen as though Notion is shifting their camera operations to Thailand so that full scale HDD parts operations can continue in Malaysia.


Risks

Their quarter performance was hindered in the 2nd quarter due to the economic crisis but have rebounded strongly in their 3rd quarter. I would say this growth stock has some good projections with it's good recovery in revenues. Still it depends on the strength of the USD vs RM and as USD is currently suffering another downfall, the risks are there.

Another risk I can think of for their HDD business is the technological advancement of flash storage media. HDD will soon be a thing of the past since the SSDs or solid state drives will soon take over the market. Although not projected to have any impact so soon. Maybe another 3 to 5 years more before SSDs become affordable to the public. So in terms of long term revenue, their HDD business has got to go. Unless the HDD technology can be further enhance to match the speed of the SSDs.

Their cashflow isn't particularly impressive but manageable, same as their debts. But if their private placement comes through, it should be a welcome addition to their operating cash levels. Though it would be mainly used for their Thai expansion. At least we know it won't get them too deep into debts.


Consolidation

Notion Vtec will be going through a 5 to 1 share consolidation in November. This will get the counter out of the "cheap stock" mentality and further reduced high price fluctuations we normally see in less than RM1 stocks. Good for stability but may force price downwards a little if the current valuations are already inflated due to market activity. Expected price after the consolidation exercise will the in the RM2.50 region based on current prices.

Conclusions

Now I always have a feeling whenever a stock is undergoing some sort of share exercise, the market will play up the share for who knows what reason. But the evaluation at the current moment is still fair but then for almost no dividend counter, a PER of 10x is a bit much based on future evaluations. But this company makes no excuse for the lack of dividends because they are trying to expand aggressively.

It all depends whether the coming economic recovery will help sustain current earnings in 2010 and subsequent opening of their Thai facilities will further increase their profits. Still a lot to read but I'm already itching to jump in.

YTLPOWER: 1st Quarter Expectations

With the conclusion of September or 1^st quarter of 2010, YTLPOWER earnings still seem shaky despite the consolidation of Power Seraya (PS)’s contributions. Foreign exchange translation changed directions again with the GBP faltering 5% at the end of Sept compared to end of June to RM5.5679 per Pound compared to RM5.8592 earlier.

The Singapore Dollar (SGD) now play as big a role as the GBP in YTLPOWER’s foreign earnings translations as PS is expected to contribute as much as 30-40% of total net profits of FYE2010. SGD appreciated about 1% at the end of Sept compared to June to RM2.4573. This quarter is also expected to show without any other extra-ordinary write-offs, the ‘new’ normal of YTLPOWER’s earnings and profits.

Due to 2009 year of write-offs coupled with falling GBP exchange, it was bad year in terms of profits for the company. 1^st quarter of 2010 will therefore set a benchmark for the rest of the year for predicting or rather forecasting earnings for YTLPOWER. No doubt it will also give the counter direction preferably upwards throughout the year.

Although historically and statistically, 1^st quarter earnings are always weaker compared to the rest of the year in the past 5 years since June 2003. Only on 2 occasions where the net profits for 1^st quarter was not in last place, which was in 4Q2004 and 4Q2009. Although they did came in 2^nd last. But nevertheless, this coming quarter results will definitely be better than 4Q2009 measly RM9mil net profit.

Challenges Ahead

On the WiMax issue, there is still no clarity from the management. Hopefully the coming AGM can at least answer generally in what way YTLPOWER is involved in this business. I still hold the believe they won’t be directly involved in the operation of the WiMax license nor will they be financing it. Still, the uncertainty about the issue has made at least one research house to downgrade the counter to SELL due to the expected participation in a “risky” business.

Their UK operations Wessex Water (WW) is also feeling some pressure. OFWAT which is the regulatory body of the UK is currently reviewing water rates for 2010-2015 for all water treatment/providers in the country. It has recently drafted a proposal to reduce water rates up to 4% by 2015. Final price limits will be announced in November 2009. From what I read in the news, I expect minimal impact to the bottom line of WW in the near future.

Come 3^rd quarter 2010 will be the interesting part as January is when up to 800mil WA warrants will be due for exercise for conversion to normal share. Expected to generate almost RM1 bil of cash for the company as well as dilute current share value by about 13%. No doubt share prices will be negatively affected and it’ll be interesting to see how management will take care of this. Although the remaining 800 mil warrants can also be exercised before January 2010 and acts as a reminder why share prices are currently subdued.

Question is, will the coming appreciation of EPS from the PS earnings will negate the dillutive effects of the 800 mil warrant conversions?

Maybulk Buckling Under Economic Environment

When the previous quarter results was released, I had an opinion that Maybulk was way over-rated for it's price. And the fact that they still paid a 30 sen dividend means it can't possibly go on forever.

The latest quarter report released by Maybulk showed improvement over it's previous quarter but still, a lot less than what it needs to continue it's trend of 30 sen dividend. Revenue improved to RM70 mil compared to last quarter's RM50 mil. Operational costs remained the same at about RM50 mil. This allowed them to post almost RM20 mil operational profits. Coupled with a RM31 mil contribution from it's associates which is Pacific Offshore Services.

Overall net profits is RM72 mil which is an EPS of 7.11 sens this quarter. That's more than 3 times less than what it earned last year in the same period.

Looking through their cash flow statements, their cash hoard was reduced tremendously after paying out RM300 mil in dividends last quarter. So this quarter, they are left with RM400mil in cash deposits with negative cash flow from their investing, operating and financing activities. If this trend of negative cash flow continues, investors can kiss their dividends goodbye. Because it is not sustainable in these economic environment where the BDI is still below 3000 points.

Their new vessels which they have ordered for long term charters are only due in 2010. With their reduced fleet size, low freight rates and lousy economic environment, they would have to scale down their dividends at least until the new ships arrived.

At current price of RM3.13, it is still overpriced. Fairer would be in the RM2.50 I would think. At least that's the price I would consider.

But without a doubt, if the BDI increases steadily in the next few months, expect Maybulk to trend together.