DBS Group Research analyst Ling Lee Keng has downgraded Nanofilm to “fully valued” from “hold”. The analyst has also lowered her target price to $1 from $1.33 previously as the company’s outlook remains weak.
In Ling’s report dated June 23, the analyst is expecting Nanofilm to report a weak set of results for the 1HFY2023 ending June 30 on the back of macro uncertainties which has affected demand for Nanofilm’s products, especially consumer electronics.
Nanofilm’s 2QFY2023 results are still expected to be weak, notes Ling, although it’s likely to be better than its 1QFY2023 results. In that quarter, the company’s revenue fell by 40% y-o-y to $33 million.
“Overall, 1HFY2023 revenue is expected to be much weaker than the $111.2 million in revenue recorded for 1HFY2022, as 1HFY2022 benefitted from the spillover of the positive impact from production that was carried forward from 4QFY2021, which was affected by the supply chain disruptions,” Ling writes.
However, the analyst sees Nanofilm’s recovery in the 2HFY2023 as “intact” even though she expects order momentum to be slower than anticipated as the company’s customers are “still cautious” and are only increasing production at a moderate pace.
“Furthermore, as the supply chain disruptions have almost fully subsided, it is not necessary to ramp up production just to keep a high level of inventory,” she notes.
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“Higher costs from the various initiatives to drive long-term growth are also expected to affect margins,” she adds.
On this, Ling has cut her earnings estimates by 58% for FY2023 and by 32% drop for FY2024. The “steep cut” was made to factor in the near-term challenges and slow order momentum.
Meanwhile, the analyst still sees bright spots for Nanofilm’s precision engineering, printing & imaging, and automotive segments although they’re only expected to contribute around 20% to the company’s overall revenue. The bulk of Nanofilm’s revenue still comes from its 3C segment. The three Cs refer to consumer electronics, communication and computers.
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She is also positive about Nanofilm’s attempt at diversification.
“The group’s Vietnam plant is targeted for completion this year. With the completion of this plant, we would expect the group to shift some of the production to Vietnam, and possibly other locations outside China, in view of the trade diversification trend in place on the back of the geopolitical tensions and the need to build a resilient supply chain,” she notes.
Nanofilm’s differentiated, proprietary, cost-effective coating solutions are also superior to its peers’ offerings and are environmentally friendly and applicable to a wide range of industries.
“This opens up a wide array of opportunities for future growth,” says the analyst.
Nanofilm’s various initiatives, which include its expansion in Vietnam, as well as its entry into the energy segment will see significant contributions but only in 2025 and beyond.
“[Nanofilm] targets to achieve revenue of $500 million and net profit of $100 million, implying an FY2021-FY2025 compound annual growth rate (CAGR) of 19% for revenue and 13% for net profit. However, given the slower-than-expected order momentum, we believe there are heightened risks to management’s target,” says Ling.
Her new target price is now based on Nanofilm’s estimated FY2024 earnings but still pegged to its P/E of 16x and around 1.5 standard deviation (s.d.) of its average since its listing.
Shares in Nanofilm closed 8 cents lower or 5.48% down at $1.38 on June 23.
