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Analysts issue downgrades on Nanofilm as outlook worsens

Felicia Tan
Felicia Tan11/18/2022 01:43 PM GMT+08  • 4 min read
Analysts issue downgrades on Nanofilm as outlook worsens
DBS has downgraded Nanofilm to 'hold' while CGS-CIMB has kept its 'hold' call but slashed its target price. Photo: Albert Chua/The Edge Singapore
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Analysts are issuing downgrades on Nanofilm Technologies amid a worsening outlook for its 4QFY2022 ending Dec 31.

DBS Group Research analyst Ling Lee Keng had downgraded her recommendation on Nanofilm to “hold” from “buy” previously as she foresees the company to report a weak set of financials for the 4QFY2022.

“Post the release of the 9MFY2022 update on Nov 3, further developments, especially with regard to the disruption to the smartphone supply chain of one of Nanofilm's key customers, and also the industrial equipment segment, has worsened, versus our earlier expectations of a gradual improvement,” Ling writes in her Nov 18 report.

“Similar to 3QFY2022, we expect 4QFY2022 to be another weak quarter y-o-y,” she explains. “In the last two years, 2H typically accounts for [around] 60% of total revenue. For 9MFy2022, the group registered revenue growth of 10% y-o-y. 1HFY2022 saw revenue growth of 15% y-o-y.”

On this, Ling has cut her forecasts for the FY2022 to FY2024 by 16% to 17%. This is to factor in the Covid-led disruptions to its key customer’s operations in China, the weakening demand for consumer products in 2023, as well as the lower industrial equipment sales affected by Nanofilm’s customers’ capital expenditure (capex) cuts.

“We have assumed lower margins as the group’s new initiatives are still at the infant stage and meaningful contributions can only come in at a later stage,” the analyst writes.

See also: Analysts 'cautiously optimistic' on TDCX’s outlook on FY2023 despite higher-than-expected 3QFY2022 earnings

On the back of the cut in earnings estimates, Ling’s target price has also been slashed to $1.39 from $2.22 previously. The new target price is pegged to 15x Nanofilm’s FY2023 earnings, down from 20x, due to the increasing macro headwinds.

That said, Ling still remains optimistic on Nanofilm’s longer-term prospects with the group’s strategies to drive growth ahead. The group’s strategies include the entry into the energy segment and the expansion into Vietnam with a mega site that’s similar in size to its China facilities.

The analyst also notes that Nanofilm targets to achieve revenue of $500 million and a net profit of $100 million, implying a compound annual growth rate (CAGR) of 19% from FY2021 to FY2025 for revenue and 13% for net profit.

See also: CGS-CIMB expects stronger 2H for Boustead Singapore, raises TP to $1.35

In Ling’s view, Nanofilm’s ability to establish, maintain, and protect its proprietary intellectual property, and the resurgence of the Covid pandemic, further aggravating the supply chain, are key risks.

CGS-CIMB Research analysts William Tng and Izabella Tan have also slashed their target price estimate to $1.37 from $1.78 previously while retaining their “hold” call. The analysts had downgraded their call on Nanofilm from "buy" on Nov 3 with a lower target price of $1.78 from $3.05.

“With the benefit of the read-throughs from Apple and Foxconn and re-looking at Nanofilm’s 9MFY2022 business update, where the company commented that the near-term operating environment remains challenging, we think that our previous assumption that FY2022 net profit could be flat y-o-y is not likely to hold,” the analysts write.

In their report dated Nov 16, the analysts now see that Nanofilm’s FY2022 net profit could decline 11.6% y-o-y to $55.0 million before recovering in FY2023.

The analysts have also reduced their revenue forecasts for FY2022 to FY2024 by 2.4% to 4.0% due to the supply chain disruptions and cautious outlook from Nanofilm’s other customers as macro-economic concerns gather pace. The reduction has led to a 3.9%-12.0% decrease in analysts’ net profit forecasts.

“Valuation-wise, with the uncertain macroeconomic outlook in FY2023, we think Nanofilm’s valuation will be driven by our FY2021 – FY2025 earnings per share (EPS) CAGR expectations as investors will refrain from paying a premium valuation till higher EPS growth returns,” the analysts write.

“Hence, we now value Nanofilm at a P/E-to-growth ratio of 1.0x (i.e. 12.6x FY2023 P/E, as our FY2021 – FY2025 EPS CAGR forecast is 12.6%), resulting in a lower $1.37 target price,” they add. “Previously, we opined that investors would be willing to pay 15.6x FY2023 P/E (a 10% premium, accorded for Nanofilm’s patented technology, to the 14.2x calendar year (CY) 2023 sector P/E of its Asian peers, as of Nov 3).

As at 1.44pm, shares in Nanofilm are trading flat at $1.38.

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