Notion VTec Berhad: ROCE Stabilization and AI-Driven Growth Signal Undervalued Precision Manufacturing Play

Notion VTec Berhad (KLSE:NOTION), a Malaysian precision engineering firm, is emerging as a hidden gem in the AI and data center infrastructure boom. While its Return on Capital Employed (ROCE) has fluctuated in recent years, a closer look reveals a strategic pivot toward high-margin sectors and a capital-light business model that could unlock value for investors. With its core components critical to enterprise data storage and EV systems, NOTION's undervalued stock presents a compelling entry point for long-term growth.

ROCE Trends: Navigating Challenges, Positioning for Upside

NOTION's ROCE has oscillated between 6.48% and 9.85% since 2020, reflecting both operational turbulence and strategic recalibration (see chart below). The dip in 2021–2022 stemmed from pandemic-era supply chain disruptions, rising aluminum costs, and non-core PPE losses. However, the recovery to 9.85% in 2023–2024 signals improved capital efficiency, driven by:
1. Focus on Core Competencies: Exiting the PPE business post-pandemic reduced overheads and redirected capital toward high-margin precision manufacturing.
2. HDD Demand Surge: Enterprise data storage clients like Western Digital and Toshiba are raising prices due to AI-driven demand for high-capacity HDDs, boosting NOTION's HDD segment profitability.
3. Automotive Expansion: New contracts for EV braking components (e.g., solenoid valves for South Korean clients) are diversifying revenue streams.

Why AI and Data Centers Are Fueling NOTION's Future

The company's precision engineering expertise is perfectly timed to meet two secular trends:
1. AI-Driven Data Storage Growth:
- NOTION supplies critical HDD components (spacers, disk clamps) to enterprise data storage systems, which underpin AI applications like generative models and autonomous vehicles.
- Western Digital reported supply shortages in 2024 due to surging AI demand, validating NOTION's position as a supplier to a bottlenecked sector.
- 30% of NOTION's revenue comes from HDDs, a segment poised for sustained growth as AI workloads require petabytes of training data.

1. EV and Smart Manufacturing Shifts:
2. NOTION's aluminum extrusion ventures (in advanced talks with Chinese partners) target $500M annual revenue by 2025, capitalizing on EV adoption and geopolitical shifts in manufacturing.
3. EV braking systems and EMS contracts (e.g., high-end electrical appliances) now account for 35% of projected revenue, leveraging its precision machining capabilities.

Financials: A Turnaround in Progress

• Revenue Growth: Q1 2025 revenue rose 34% YoY to RM126M, with net profit up 58% to RM12.7M, driven by margin expansion to 10%.
• Valuation Discount: Trading at RM0.61 (65.7% below fair value estimates), NOTION's strong financial health (debt/equity of 2.4%) contrasts with its undervalued stock.
• Snowflake Score: A “Strong Financial Health” (6/6) rating, despite low dividend yield (0/6), underscores its balance sheet resilience.

Risks to Consider

• Market Cap Constraints: At RM323M, NOTION's small size limits liquidity and raises valuation risks.
• Joint Venture Execution: Aluminum extrusion ventures depend on finalizing partnerships with Chinese firms, which could delay revenue.
• Dividend Uncertainty: No cash dividends since 2019; investors rely on capital appreciation.

Investment Thesis: Buy the Dip for Long-Term Gains

NOTION's ROCE stabilization, strategic focus on AI/data center-critical segments, and undervalued stock make it a high-reward, medium-risk bet. Key catalysts include:
1. HDD Revenue Growth: Capitalizing on Western Digital's price hikes and AI-driven demand.
2. Aluminum Venture Finalization: A successful JV could unlock its RM1B revenue target by 2026.
3. Margin Expansion: Gross margins improved to 20.17% (TTM), suggesting operational leverage.

Conclusion

Notion VTec is a precision engineering play with asymmetric upside in AI and EV infrastructure. While risks like execution and valuation remain, its ROCE recovery and alignment with tech megatrends position it as a rare undervalued stock in a capital-light, high-growth sector. Investors seeking exposure to the AI storage boom should consider NOTION as a long-term hold, ideally at current depressed levels.

Word of Caution: Monitor quarterly updates on HDD demand trends and JV progress. Avoid if risk tolerance is low.