Analysts are neutral on Nanofilm Technologies International MZH with “hold” calls around the board following the company’s earnings for the FY2022 ended December 2022.
UOB Kay Hian analyst John Cheong has upgraded his call for Nanofilm to “hold” with an increased target price (TP) of $1.28 from $1.02 previously, while CGS-CIMB Research’s William Tng has maintained his “hold” rating with an unchanged TP of $1.39.
In his report dated Feb 23, Cheong says that Nanofilm’s FY2022 earnings of $44 million, a 30% decline y-o-y, missed his estimate by 16% due to the challenging operating environment. According to him, Nanofilm’s FY2022 performance did not come as a “major surprise”, as the company had earlier issued a profit warning and warned of a weak performance.
Some reasons that Nanofilm highlighted for the weaker FY2022 earnings and revenue include higher expansion costs for future growth, disruptions faced by a key final assembly supplier of its major customer, China's rapid reopening in December 2022 which caused a spike in Covid-19 infections and softer end-consumer demand due to recessionary fears.
Nanofilm continues to face a challenging outlook in 2023 as the macro environment remains tough with inflationary pressures and rising interest rates, says Cheong. He expects Nanofilm’s China operations to remain soft in 1QFY2023, and should see a gradual recovery only in 2HFY2023.
In 2022, two of Nanofilm’s business units (BUs) were down, including its largest segment — the advanced materials BU, which recorded a 4% y-o-y decline in revenue and contributed 79% of revenue in 2022, with 3C products contributing around 75%. Industrial equipment BU revenue also fell 31% y-o-y as the macro uncertainties and weak foreign currencies resulted in customers delaying their capex spending, says Cheong.
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According to the UOB Kay Hian analyst, the only bright spot for Nanofilm was its nanofabrication BU, which was the only segment to record a revenue growth of a 145% y-o-y increase as it benefitted from continued ramp-up of mass production projects.
Cheong had reduced his earnings forecasts for FY2023 and FY2024 by 24% and 4% after reducing his revenue forecasts by 13% and 1% respectively to factor in the potential slowdown in end-consumer demand amid a challenging macro environment with geopolitical tensions, inflationary pressures and rising interest rates. His revised earnings estimates indicate y-o-y earnings growths of 7% and 54% for FY2023 and FY2024.
He values Nanofilm based on an 18x FY2023 earnings per share (EPS) multiple, pegged to 1 standard deviation (s.d.) below its long-term forward mean to reflect the challenging environment it is facing, which could lead to further de-rating of its price-to-earnings ratio (P/E) multiple. Cheong had previously valued Nanofilm based on an 11x FY2023 EPS multiple, 2 s.d. below its long-term forward mean.
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“The increase in our valuation multiple is due to a less challenging outlook for FY2023 compared to FY2022, when earnings fell significantly due to multiple challenges. Nanofilm’s FY2023 P/E of 20x is at a premium compared to its Singapore peers, which are trading at FY2023 P/E of 9x,” says Cheong.
Meanwhile, CGS-CIMB’s Tng says Nanofilm’s FY2022 performance was largely in line with his expectation for earnings of $43 million.
Tng notes that Nanofilm has reiterated its FY2025 revenue and net profit targets of $500 million and $100 million. He adds that the company also thinks that the outlook for China in 1QFY2023 remains soft but that there could be a gradual recovery in 2HFY2023.
For FY2023, key developments for Nanofilm include the first phase of its Vietnam production campus which is expected to be completed by end-FY2023 and the completion of the ApexTech plant’s renovation by 1HFY2023 with production scheduled to commence in 2HFY2023, he says.
New projects are also under development for the company’s nanofabrication BU, with initial small production volumes set for FY2023 and with possible mass production expected in FY2024 to FY2025 if the projects are successful, as well as Sydrogen’s mass production of coated bi polar plates which is expected to commence in 2HFY2023.
Tng’s unchanged TP of $1.39 is based on a 12.6x FY2024 P/E, while his FY2023 to FY2024 EPS forecast has increased by a marginal 0.03% 0.04% as the number of shares decreased with share buybacks conducted by Nanofilm in FY2022.
His potential upside risks include new order wins from customers and market share gains, as well as faster progress with ApexTech and Sydrogen in FY2024, leading to higher net profit contribution.
On the other hand, downside risks include Nanofilm’s high customer concentration and the possible emergence of competing suppliers as its key customer diversifies its reliance on suppliers located in China.
As at 2.15pm, shares in Nanofilm were trading 5 cents or 3.45% up at $1.50.
