DBS Group Research has upgraded Nanofilm Technologies International MZH from "fully valued" to "hold" following signs of recovery in its key consumer electronics segment as seen by its 1QFY2024 business update. The target price is unchanged at 63 cents.
On April 22, the company, which provides coating services for parts used in electronics and other products, reported that its 1QFY2024 revenue was up 19% y-o-y to $39 million.
The gain was led by a recovery in its so-called 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 magnitude of 31% y-o-y to $12.8 million, partly helped by slightly improved gross margin of 33% versus 30% fetched 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.
See also: With 300MW wind-solar project win in India, Sembcorp at 64% of 2028 renewable energy goal: CGSI
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 following 4QFY2023.
Another key product segment, automotive, enjoyed revenue growth of 24% y-o-y.
See also: PhillipCapital maintains ‘buy’ on Zixin Group Holdings; upgrades TP to 5.6 cents
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 activity base, China.
India will start small batch production in the second half of this year while the first phase of its second site in Vietnam will commence initial production within this quarter.
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 there will be some improvement to 40% this year, from 37% managed in the preceding FY2023.
Furthermore, significant contributions from its other new businesses, including hydrogen fuel cells, advanced EV batteries, and solar cells, are only expected in 2025 and beyond.
DBS points out that following its prior downgrade last June to "fully valued" from "hold", Nanofilm's share price had plunged by three-fifths.
Now, with the smartphone and PC segments picking up from their respective troughs, DBS believes that the outlook for the company "should improve".
For more stories about where money flows, click here for Capital Section
The same price target of 63 cents is still based on 18x earnings, slightly below -1SD from its four-year average on FY2024 earnings.
William Tng of CGS International, in his April 23 note, has found some positive signs by the resumption of revenue growth in the 1QFY2024 update, with expectations that the whole of FY2024 will be better versus FY2023.
However, Tng warns that because of the various investments as well as 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, he has trimmed his FY2025 gross margin assumptions by 1.3 percentage points, resulting in a 6.8% cut in his earnings forecast for that year, and thereby a lower target price of 70 cents from 75 cents previously.
The target price is derived from 2025F P/E of 12.1x, 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 FY24-25F 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 remains 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 seen in this current FY2024 to be driven by the strong consumer segment pipeline, which will further pick up in the late 2Q and 3QFY2024 because of seasonal patterns.
However, Cheong and Mo warn that growth rates that will be recorded for FY2024 is also due to the low base suffered in the preceding 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 16x 2024 earnings, which is pegged to -1SD to 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.
