Notion- going thru the motion

Results Update

Notion has just announced its results for QE30/9/2010. Its net profit increased by 172% q-o-q but dropped by 38% y-o-y to RM8.1 million on the back of lower turnover of RM53 million (which declined 13% q-o-q or 2.5% y-o-y). The company attributed "the lower revenue... to decrease in sales from HDD segment and the lower USD foreign exchange rate versus the Malaysian Ringgit". The improvement in net profit is mainly attributable to "lower R&D cost, improved material yield, less incidence of rework and quality issue, foreign exchange gain from hedging contracts and reinvestment allowances resulting in lower taxation".

The big question is how much of the improved bottom-line is due to the reduction in R&D cost. A company may enjoy a short-term boost from this action but prolonged reduction of R&D cost would lead to loss of long-term competitiveness. The rebound in the bottom-line cannot disguise the uncertain outlook for Notion's HDD segment which was still suffering from poorer demand.


Table: Notion's last 8 quarterly results


Chart 1: Notion's 16 quarterly results

Financial Position

Notion's financial position is deemed satisfactory. As at 30/9/2010, its current ratio stood at 1.9 times while its debts to equity stood at 0.4 time.

Valuation

Notion (closed at RM1.64 yesterday) is now trading at a trailing PE of 6.5 times (based on last 4 quarters' EPS of 25.29 sen). At this multiple, Notion is deemed undemanding. However, with the negative outlook in the HDD sector, the market is not likely to assign a higher PE multiple for this stock.

Technical Outlook

Notion dropped from its peak of RM3.46 in March 2010 to a low of RM1.50 in September. The stock is now consolidating between RM1.50 & RM1.80. I believe the stock is likely to remain in this trading range for the next few months (until the outlook of HDD sector has improved).


Chart 2: Notion's weekly chart as at Nov 22, 2010 (Source: Quickcharts)

Conclusion

Based on the uncertain outlook for the HDD sector, Notion is expected to trade sideway for the next few months. For those who believe in swing trading, you may try to get into this stock at RM1.50-1.60 & sell at RM1.80.