NOTION VTEC BHD (NVB) has announced another private placement exercise of up to 10% of total shares for capital expenditure for the construction of their new factory in Klang. NVB has also announced they are issuing free warrants that lasts for 5 years. Exercise price to be determined at a later date.
No doubt news of the new private placement of 10% total shares has affected the market price of the share close to RM3.02 from the higher range of RM3.30. Or roughly 10% less than before. This is logical considering the share was priced roughly a PER of 10x to the expected EPS of 33 sens. With additional 10% shares, the EPS will be eroded by the same percentage and thus the share was sold down.
Previous private placement was first announced on 22nd Oct 2009 when share prices was slowly inching up due to news of the consolidation exercise and better EPS. Subsequently in Jan 2010 at RM2.44 or 10% cheaper than market price, the private placement was done and was later announced the private placement was to strategic investor Nikon which is one of their major customers. This is considered good news as its a win-win situation for both of them.
The rationale for this current private placement is to cater for future capital expenditure for the centralised 2.5" HDD baseplate facility in Klang. And again this private placement is targeted at long term institutional or strategic investors. Like Nikon for the previous placement, NVB could place this shares to Samsung since that would be their main customers for the HDD baseplates although they are not restricted to them.
OSK in its latest research report on NVB after an analyst briefing was that NVB gave a guidance of RM228 mil revenue FY2011 from the HDD baseplates alone. That means FY2011, revenue might double although EPS will not grow as much due to dilution from the private placement and warrant issue. New target price was RM3.88 upgraded from RM3.55 in their previous report.
Warrants
The free warrants is a separate fund raising activity not conditional on the placement although the number of warrants can be higher depending on the number of share placed during the warrant issue. The warrant has a life of 5 years and is a great alternative to NVB mother share mainly because NVB has very minimal dividends to begin with and will not pay significant dividend for time to come due to its rapid expansion. Warrant conversion is 1:1 and since it's free, the exercise price could well be near the current price of the share with possibly 10% discount. Therefore holding the warrant might be more economical if one is intending to ride the capital appreciation of NVB. Cash from the warrant conversion will be used for working capital. That's an average of RM20 mil/year for 5 years if the exercise price is at current market price of RM3.02.
If we use their lower expectation of RM50 mil net profit FY2010, and assuming all warrants were exercised and private placement is 10%, EPS is reduced to 24.5 sens compared to current expected 33 sens. At RM3.02 now, PER is 12.3x based on expected diluted fore casted EPS and without taking into account the future earnings and growth of the company FY2010. Warrants exercise price is expected to be discounted 10% like the private placement so it should be a slight boon to investors currently holding the shares.
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