Initially what was thought to be a result of a profit guidance by Western Digital of the HDD market which is slowing down, most investors and some research houses still re-affirm their BUY calls for the stock. The quarterly results was expected to be reported on August 5th and up until end of July there were still research houses affirming their BUY calls, stating that management through analyst briefings has shown that the costs of HDD start-up was manageable and on track.
But the slide continued, somehow pointing out that some major parties probably knew something was wrong and the expectation of a bad result grew stronger and stronger until the last day before the release of the results. Research houses who weeks earlier trumpeted the expansion programs of the company suddenly made large U-turns in their expectations and posted new targets of almost 50% off their previous Target Price. Forward PERs were also slashed and warnings of bad results and a clearer picture of the company will come to light post results and subsequent analysts briefings the following day.
The stock touched a low of RM2.01 during the opening hours of August 4th, one day before the results before selling subsided. In the final hour there was a enthusiastic push towards RM2.20 with SELL queues snapped up. At 4.45pm, the SELL queue at RM2.20 grew to almost 2 million shares and the moment the TCP was set and the market re-started for the last 10 minutes, the SELL queue was snapped up again diminishing the queues at RM2.20. It was the last triumph for the stock before the next day.
On release day selling continued and although there was a a slight push at the end of the day, the stock closed lower at RM2.04. Then come the wait for the results after market hours.
Results Released
The report was finally released to the public and showed that NOTION although increased their revenue for the 3rd quarter, their costs of operation shot up and diminished their profit margins. Their HDD 2.5" base-plate operations start-up was blamed for their increased cost and profit guidance for the rest of the year was trimmed from RM50 mil to RM30 mil. Management also expected coming quarters to be similarly pressured by the start-up cost and the last quarter was expected to bear the full brunt of the cost of start-up.
Net profit for the quarter came to only RM3 mil which is 75% lower than previous quarter due to higher costs of operation. Management expects the last quarter to be worse and to date EPS of 20 sens after 3 quarters is internal target for the rest of FYE2010. Meaning next quarter they expect to either break-even or eek out a slight profit only. Maybe even a loss making quarter.
1. Antidisc program was more or less a failure, with cancelled orders from the customers due to contamination issues on one of the production lines.
2. HDD 2.5" base-plate start-up was also a head-ache for management which suffered extremely high rejection rates and thus loss making and will be for the next 2 to 3 quarters.
3. Lower orders from major customers for HDD in the near future from Western Digital.
4. Lower exchange rate of USD to RM compounded their problems.
Research Houses
After the results was out, all came out cutting forecasts and slashing forward PERs and target prices. The company stock is now rated under-perform and all research houses recommends a SELL and advises to cut loss. Perhaps the most fitting description of all the u-turns and change of heart for the research houses can be summarised by a quote from Maybank Investment report;
"More headwinds ahead. Notwithstanding the Samsung production setback, Seagate and Western Digital’s quarterly results which fell short of expectations and the grim outlook on ASP trends are telltale signs of weakness ahead. That aside, management will face the daunting task of regaining investors’ confidence following inaccuracies in quarterly guidance, a major sore point for now." <-- No shit.
Prospects
As a company, Notion is growing and expanding rapidly. Maybe to fast for its own good where it rushed through their programs until they could not keep up with the quality. The antidisc program is a prime example where their reputation is tarnished and the customer rejected the rest of their quality management and cancelled their orders.
In the report management stated they are re-organizing their in-efficient manufacturing process which is incurring additional costs. Funny that they didn't organize themselves before they actually started operations which shows they somehow lack the operational expertise to start-up properly.
Notion is now a pariah in the eyes of the investment houses which used to praised it continuously. Why the hate? Well because the management more or less misled the analysts about their current state of affairs. This report isn't what happen last week, it is reporting what happen from April to June, which is months ago but they still brief the analyst that everything is hunky dory in the past few weeks.
Financially, at current prices of around RM2.0x, their warrants which has an exercise price of RM2.55 are pretty much worthless and they won't be getting any capital injection from that. Private placement is also more or less cancelled since the free fall in price. Their latest report showed their short and long term borrowings increased and thus additional financial costs will be expected in all future reports.
Camera and automotive segments is still profitable and resilient with some growth in revenue for both. Higher revenue is expected next quarter for the camera segment which would probably be overshadowed by the costs of their HDD 2.5" base-plate operations.
It's too risky to jump in unless the company can show it has successfully reduced their costs effectively in their new start-up and it is actually making more money from them. Their higher financial costs will burden their future net profits and that is likely to stay will not reduce until they pay them off. Best is to wait what the next 2 quarters show and see if the investing public find favor with it again.
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