DBS Research analyst Ling Lee Keng has maintained her “buy” call for Nanofilm Technologies with a lower target price (TP) of $3.21 from $3.70 previously, as she trims the company’s forecasted earnings for FY2022 and FY2023 by 7% and 6% respectively.
The lowered earnings forecast comes on the back of the persistent margin pressure and weak consumer sentiment.
“We have trimmed revenue by 6%, and the net margin assumption for FY2022 to 23.6% from 24.2% previously. Earnings for FY2022 and FY2023 are now expected to grow 13% and 19% respectively,” Ling writes.
The lower TP is also due to the lower P/E peg. The new TP is now pegged to Nanofilm’s FY2022 P/E of 30x, down from 32x previously. The previous P/E of 32x is the average P/E since mid August 2021, following Nanofilm’s weak 1HFY2021 earnings.
Although the global supply chain is in recovery, Ling expects margin pressure from lockdowns in China and ongoing inflation, which have led to higher costs for companies, to persist.
“With the worst in supply chain disruptions likely behind us, Nanofilm is expected to rebound strongly. However, margin pressure continues to persist, due to the current inflationary environment coupled with higher costs as a result of the recent lockdowns in China,” writes Ling.
For Nanofilm, margins for products that have more than one supplier are more affected than the single-source products, where the group is the sole supplier, she explains. The recent lockdowns in China could add further pressure to the margin. Nanofilm’s key manufacturing facility is in Shanghai, which was under lockdown from April to May.
“Though the group was still able to function in a closed-loop environment to deliver the bulk of the orders, some orders were affected,” Ling says, adding that the closed-loop production environment has also led to higher costs, mainly pertaining to manpower and logistics.
These higher costs should be reflected in the upcoming 1HFY2022 results and the analyst expects the group’s margins for the half-year period to be hit.
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The weakness in end-market demand for electronic devices such as smartphones, wearables, and PCs is also a concern for the analyst. Nanofilm has a 63% revenue exposure to the 3C (Consumer Electronics, Communication and Computers) segment as at 1QFY2022.
“Demand for electronic devices has been relatively weak in recent months. This trend could continue mainly on the back of the increasing rate of inflation around the world, and
also the rising risk of recession,” writes Ling.
“The group has not seen any indication of a cut in customer orders so far, as its products are mainly in the premium segment, which is less sensitive to demand volatility. However, the overall weak consumer sentiment remains a concern,” she adds.
Ling has also attributed the slowdown in orders for some of the consumer electronic products mainly to the semiconductor chip shortage.
Meanwhile, more bright spots for Nanofilm could include its investments made in the new Shanghai Plant 2, which Ling says positions the company well to capture a higher market share, as well as entry into new markets.
“Leveraging on its nanotechnology solutions, which are adaptable for use across a wide range of industries, we believe there is ample room for the group to gain new customers,” says Ling.
As at 10.37am, shares in Nanofilm were trading 1 cent higher or 0.5% up at $2.00.
