Citi Research analyst Jame Osman has downgraded his recommendation on Nanofilm Technologies to “sell” from “buy” previously.
In his Nov 3 report, Osman explains that the downgrade comes due to two key factors.
First, the analyst expects the deceleration in Nanofilm’s topline momentum to persist in the near-term. Uncertainty over the trajectory of a recovery in the industry’s value chain also poses a key downside risk, he explains.
“The deceleration in Nano’s revenue growth (at 10% y-o-y for the 9MFY2022 ended Sept 30) was concerning to us particularly given the comparatively low base in 3QFY2021 due to previous supply chain delays pushing out FY2021’s seasonal peak production into 1QFY2022,” Osman notes.
He adds: “Management attributed the 3QFY2022 weakness to value chain disruption in China, including key FATP players such as Foxconn. Management expects this to persist into 4QFY2022, while an eventual recovery may be predicated on its key Customer Z’s supply chain strategies in China going forward.”
“This poses downside risk to current expectations for Nanofilm given its significant production exposure in Shanghai, in our view,” he continues.
See also: UOBKH calls Centurion Corp a stock for ‘growth-minded investors’
Second, Nanofilm’s plans to scale up its production capacity across several markets are likely to mean front-loaded gestation costs. The costs are also likely to put pressure on the group’s margins. At the same time, revenue contribution from Nanofilm’s potential new customers will contribute meaningfully only from FY2024 onwards.
On this, the analyst has cut his earnings per share (EPS) estimates for the FY2022 to FY2024 by 8% to 18%. The lower EPS estimates are mainly to factor in lower revenue growth as well as lower margin assumptions.
Osman has also raised his weighted average cost of capital (WACC) assumption to 8.3% (from 7.5%) factoring a higher risk-free rate of 3.5%. His terminal growth rate assumption is also lowered to 2.0%.
See also: With 300MW wind-solar project win in India, Sembcorp at 64% of 2028 renewable energy goal: CGSI
On this, the analyst has slashed his target price to $1.55 from $3.18.
“Despite the 54% year-to-date (ytd) share price decline (versus the Straits Times Index’s 3% decline), we now anticipate further headwinds ahead driven by an uncertain demand recovery as well as margin pressure from capacity expansion plans,” he writes.
“In our bear case scenario, we see a further 47% downside from current levels [of $1.79 as at Nov 2],” he adds. “Our revised target price and FY2023 EPS imply a P/E ratio of 14x versus [an] EPS compound annual growth rate or CAGR of 8% over the FY2022-FY2024.”
Shares in Nanofilm closed 6 cents lower or 3.35% down at $1.73 on Nov 3.
