964 Broker's Digest

Fortress Minerals
Price target:

PhillipCapital “buy” 28 cents

Healthy volume growth with recovery of construction industry

PhillipCapital’s Vivian Ye has initiated coverage on Malaysian iron ore producer Fortress Minerals with a “buy” rating and target price of 28 cents.

Its mining concession is located in Bukit Besi, Terangganu, Malaysia, with 7.18 million tons of reserves and 13 years of concession life. As FY2019 was Fortress Minerals’ maiden year of commercial production, profitability margins were partly crimped by initial ramp-up costs and gestation, notes Ye.

However, she expects growing demand from steel mills in Malaysia to spur higher sales volumes, citing GDP growth projections of 6.5 to 7.5% for 2021 and 13.9% growth in the construction sector.

To meet demand, Ye expects Fortress Minerals to increase production by 54% from FY2020 to FY2022. According to him, Fortress Minerals enjoys better gross margins of 66.7% versus the industry average of 50% partly due to its close proximity of its mine with the steel mills.

Finally, Ye notes that Fortress Minerals has “considerable exploration upside potential” as only 5% of the concession area is explored. As Fortress Minerals only completed its plant expansion in late FY2020, there is more potential for mining as larger tracts are explored. Fortress Minerals’ mining rights will only expire in early 2033. — Lim Hui Jie

Nanofilm Technologies International

Price target:

UOB Kay Hian “buy” $4.52

CGS-CIMB “add” $5.52

Capacity expansion, demand growth, proprietary technologies

UOB KayHian has raised its target price of Nanofilm Technologies International from $4.07 to $4.52 on expectations that the company is poised to generate higher earnings from expanded capacity while commanding better margins.

In their Dec 10 note, analysts John Cheong and Joohijit Kaur have narrowed their valuation of this stock based on a narrower discount of 17% compared to peers, from 25% earlier, as more analysts start covering this counter. They initiated coverage on Nanofilm just on Nov 26 with an original target price of $4.07.

“Our target price implies a 38.7x 2021F price-to-earnings (PE). We believe its unique technology, superior net margins and sole supplier status for most of its major customers provides a strong competitive advantage and warrants a premium to peers,” they say.

With a combination of capacity expansion, stronger demand from customers, UOB KayHian’s analysts see a “potentially robust 2HFY2020” for the company.

CGS-CIMB is even more bullish on the stock, which was listed on Oct 30 at an IPO price of $2.59. In their initiation report dated Dec 11, CGS-CIMB analysts William Tng and Darren Ong have started NanoFilm at “add” with a target price of $5.52.

This is based on 35.3 times estimated FY2022 earnings per share (EPS) that is supported by 35.3% EPS growth over between FY19–FY22, and sustainable net profit margin given its sole supplier status and proprietary technology moat.

For one, they also note that the company is the only one around the world to offer the so-called Filtered Cathodic Vacuum Arc coating technology on a commercial scale as at Oct 23.

Against conventional coating technologies, its offerings provide greater functional and cosmetic advantages and are also environmentally-friendly.

“NanoFilm’s patented technology (key patents’ expiry range from 2025–2039) lends confidence to our 30% average net profit margin driving net profit growth of 21.8–60.7% over FY20–22F,” say Tng and Ong.

Tng and Ong expect wearables, which includes products such as smartwatches, to be a new growth area for the company, generating 30% of earnings growth from FY23 onwards.

The strong growth in smartwatches, which grew 20% globally y-o-y in 1HFY2020 could also benefit the company, note the analysts. “We think strong demand for smartwatches will sustain the high growth momentum of its wearables business. We expect a replacement cycle to drive Microsoft Surface tablet sales (benefitting NanoFilm, sole coater of the Surface tablet logos).”

“NanoFilm is also the sole coater for 90% of its major customers as at Oct 23, including being the sole supplier of Fresnel lenses (used in smartphones) for certain models for customer Z. Other long-term growth drivers include demand for coating in automotive piston rings and consumer electronics,” they add. — Felicia Tan

Raffles Medical Group

Price target:

UOB KayHian “buy” $1.07

A laggard on the recovery theme

UOB KayHian analysts Lucas Teng and John Leong have maintained their “buy” call on Raffles Medical Group with an unchanged target price of $1.07.

The analysts describe Raffles Medical as a “laggard on the recovery theme” and expect local patient load to reach “normalised levels that are on a par with pre-Covid-19 admissions”. They note that medical services have largely seen a recovery in 2H2020, with private hospital admissions in Singapore down by only 9% y-o-y in October.

They think that demand for domestic medical services has largely normalised although the remaining portion of demand, made up of medical tourists, is still lacking.

Furthermore, with the news that Singapore could start inoculating its residents soon, Teng and Leong say the reopening of the hospital could help contain costs. Tests and vaccine administration would provide marginal support if private GP clinics are used for such purposes.

They also note that Raffles Medical’s Chongqing hospital’s utilisation has grown y-o-y in recent months. Raffles Medical’s Shanghai hospital, slated for completion, is likely to open via phases after Chinese New Year in 2021.

The analysts expect Raffles Medical’s earnings to recover by around 50-60% h-o-h in 2HFY2020, though it could still be down by about 10-15% y-o-y.

“Raffles Medical remains well positioned, with a strong balance sheet and longer term benefits of expansion into the China hospitals segment. In our view, local medical services have shown a resilient recovery and news of returning foreign patient load would be a positive for the group,” Leong and Teng note. — Lim Hui Jie