Nanofilm Technologies International

Price targets:

DBS Group Research ‘hold’ 63 cents CGS International ‘hold’ 70 cents UOB Kay Hian ‘sell’ 56 cents

Revenue growth has resumed but less so for margins

DBS Group Research has upgraded Nanofilm Technologies International from “fully valued” to “hold” following signs of recovery in its key consumer electronics segment in its 1QFY2024 ended March business update. The target price is unchanged at 63 cents.

On April 22, Nanofilm, which provides coating services for parts used in electronics and other products, reported 1QFY2024 revenue rose 19% y-o-y to $39 million.

The gain was led by a recovery in its socalled 3C or computer, communication and consumer segment. Nanofilm made some inroads with new customers and secured additional business from existing customers.

Gross profit for the quarter was up a bigger 31% y-o-y to $12.8 million, partly helped by a higher gross margin of 33% versus 30% in 1QFY2023. Overall, the numbers were broadly in line with the projection of DBS.

Nanofilm’s key advanced materials business unit, which provides coating services, reported a 41% y-o-y jump in revenue, contributing 89% to the total sales. Within this unit, the smartphone product segment was the key growth driver, thanks partly to a “notable” new customer. “The strong performance is in line with our view that the mobile and PC industries have emerged from their trough,” says DBS, referring to the period after 4QFY2023.

Another key product segment, automotive, enjoyed revenue growth of 24% y-o-y.

However, Nanofilm’s other smaller business units, such as the one making and selling the coating equipment to other companies, remained relatively weak, with revenue down 66% y-o-y due to lower orders.

DBS notes that Nanofilm is on track for its so-called “China +1” strategy, where it invests in new capacity in India and Vietnam, other than its main base in China. India will start small batch production in 2H2024 while the first phase of its second site in Vietnam will commence initial production in 1Q2024.

DBS points out that as the new investments are still in the development stage, Nanofilm’s gross margin will still be below its historical average of 52% although it is expected to improve to 40% in FY2024 from 37% in FY2023.

Furthermore, significant contributions from its other new businesses, including hydrogen fuel cells, advanced batteries for electric vehicles and solar cells, are only expected in 2025 and beyond.

DBS points out that following its downgrade last June to “fully valued” from “hold”, Nanofilm’s share price has plunged by 60%.

Now, with the smartphone and PC segments picking up from their respective troughs, DBS believes that the outlook for the company “should improve”. The same price target of 63 cents is still based on 18 times FY2024 earnings, slightly below –1 s.d (standard deviation) of its four-year average earnings.

in his April 23 note, William Tng of CGS International found some positive signs with the resumption of revenue growth in the 1QFY2024 update. He expects FY2024 to be better than FY2023.

However, Tng warns that because of the various investments and uncertainty over volume and mix, Nanofilm’s gross margin will “take a while” to recover back to the 46%– 49% levels enjoyed in FY2021 and FY2022.

As such, Tng has trimmed his FY2025 gross margin assumptions by 1.3 percentage points, resulting in a 6.8% cut in his FY2025 earnings forecast and a lower target price of 70 cents from 75 cents. The target price is derived from 2025F P/E of 12.1 times, a 10% discount to its peer average as customer concentration risk remains and its operating costs, though being controlled, remain high, says Tng.

Nonetheless, he has upgraded his call from “reduce” to hold” as the resumption of revenue growth raises the prospects that Nanofilm

can deliver better-than-expected FY2024– FY2025 EPS growth.

Upside risks include new order wins from customers, faster operational progress at the various joint ventures and strong demand upturn. Downside risks, on the other hand, include high customer concentration, and higher operating costs as the company expands into other countries and businesses.

On the other hand, UOB Kay Hian analysts remain bearish on this counter, as they reiterate their “sell” call. While revenue growth was in line with expectations, the company remains in the red, according to analysts John Cheong and Heidi Mo in their April 24 note.

They expect growth in FY2024 to be driven by the strong consumer segment pipeline, which will further pick up in the late 2Q2024 and 3Q2024 because of seasonal patterns.

However, Cheong and Mo warn the growth rates for FY2024 are also due to the low base in FY2023.

Citing the cost of Nanofilm’s various expansion projects in the likes of India and Vietnam, the UOBKH analysts have trimmed their FY2024 earnings forecast by 6% to $23 million from $25 million.

This leads to a lower target price of 56 cents, from 60 cents previously, as they maintain their valuation of the stock at 16 times FY2024 earnings, which is pegged to –1 s.d. of its long-term forward mean.

“While Nanofilm’s new projects and initiatives point to a recovery, we think that earnings recovery will take some time due to multiple expansion projects and weakness in the higher margin business and coating of wearables,” state Cheong and Mo. —