Following Nanofilm’s update, Jame Osman of Citi Research has maintained his “sell” call with a lower target price of $1.08 from $1.27 previously, while CGS-CIMB Research’s William Tng and Izabella Tan have kept their “hold” recommendation with an increased target price of $1.57 from $1.39 previously.

According to Citi’s Osman, Nanofilm’s near-term customer demand outlook remains soft, particularly in the 3C space.

“Despite our expectation of order backlog pushout from 4QFY2022 into 1QFY2023, Nanofilm’s management stated that 1QFY2023 revenue was mainly affected by industry weakness for consumer electronics and overstocking, and not market share loss to competitors,” he explains.

Osman says that revenue from 3C customers contributed some 50% to Nanofilm’s overall revenue, and that within 3C, wearable technology was the most impacted, followed by computers and smartphones. Near-term, the company sees a “longer-than-expected” recovery period in the China market, he notes.

Meanwhile, Nanofilm’s capacity expansion will be driven by supply chain diversification, with one of its key customers relocating and diversifying its supply chain away from China. “We think this also contributed to revenue deceleration. Consequently, Nanofilm management is looking to rationalise capacity at its Shanghai Plant 2 and reconfigure equipment for use at other facilities to boost utilisation, which currently stands at less than 50% capacity overall,” says Osman.

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='/capital/brokers-calls/rhb-upbeat-raffles-medicals-contract-win-providing-medical-services?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>RHB ‘upbeat’ on Raffles Medical’s contract win for providing medical services at Connect@Changi</a>

He has cut his FY2023 and FY2024 earnings per share (EPS) estimates by 14% and 10% respectively, mainly after lowering our revenue forecasts to reflect expectations of a slower-than-expected demand recovery.

Osman has also introduced his FY2025 forecasts, and sees “significant challenges” ahead for Nanofilm to achieve its 2025 target of $500 million in revenue and $100 million in profits.

As a result, Osman has lowered his discounted cash flow (DCF) based target price to $1.08 from $1.27 previously, maintaining a “sell/high risk” rating as he anticipates further headwinds driven by uncertain demand recovery and margin pressure from capacity expansion plans. His revised target price and FY2023 EPS estimates imply a price-to-earnings ratio (P/E) of 17x, compared to an EPS compound annual growth rate (CAGR) of 10% over FY2022 to FY2025.

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On the other hand, Tng and Tan of CGS-CIMB say that Nanofilm is optimistic that its 2HFY2023 could be better than 1HFY2023 as its customers “ramp up” activities in the second-half of the year.

According to them, 1QFY2023 is a “seasonally weaker” quarter for the Advanced Materials Business Unit (AMBU) segment as demand for consumer electronics products tends to be stronger in the second-half of the calendar year. China’s slower-than-expected recovery post-reopening and lower end consumer demand across all segments also contributed to the revenue miss.

They say that Nanofilm expects a gradual revenue recovery in 2H2023 aided by the recovering Chinese economy and pick-up in customer activities.

Tng and Tan add that Nanofilm is also keen on mergers and acquisitions (M&As) in Europe in order to provide its coating services and industrial equipment sales in the region. However, they note that these acquisitions could take time to reap benefits for Nanofilm while adding to its cost structure in the immediate term.

“Given Nanofilm’s historical 1H:2H revenue mix of 40:60 and higher operating costs in preparation for new businesses to come onstream in FY2024, we think it could continue to see a second year of net profit decline,” say the analysts, who have cut their FY2023 revenue forecasts by 17.1%, leading to a 25.4% cut in FY2023 EPS forecast.

Their increased target price of $1.57 from $1.39 previously is based on a FY2024 P/E of 14.22x, a 10% discount to the average of Nanofilm’s peers globally and in Asia.

Meanwhile, the CGS-CIMB analysts believe that FY2024 earnings drivers include potentially higher revenue contributions from Nanofilm’s 65%-owned Sydrogen and ApexTech joint venture (JV).

For more stories about where money flows, <a class='gtm_see_also_3_inread' style='text-decoration: underline;' href='/section/capital?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>click here for Capital Section</a>

They note that Sydrogen is on track for mass production of its bipolar plate (BPP) coatings in 2H2023. Nanofilm also expects the initial batch equipment for its green plating business under the ApexTech JV at its Zigong site in China to be commissioned and qualified in 2H2023, with the inline coating equipment scheduled to come onstream in 2023 and begin revenue contributions.

Osman also points out that although new customer projects across both its AMBU and Nanofabrication Business Unit (NFBU) segments are “progressing”, he only expects them to “contribute meaningfully” from FY2024.

“We continue to expect margin pressure from gestation costs related to significant capacity expansion for ApexTech (targeting initial production in 2HFY2023) as well as in Vietnam, in addition to our estimates for startup losses from Sydrogen of around $4 million to $5 million,” says the Citi analyst.

Tng and Tan’s upside risks for Nanofilm include new order wins from customers as well as faster operational progress at ApexTech and Sydrogen in FY2024, leading to higher net profit contribution.

Their downside risks include a high customer concentration and the possible emergence of competing suppliers as its key customer diversifies its reliance on suppliers located in China.

As at 3.22pm, shares in Nanofilm were trading 1 cent or 0.66% down at $1.50.

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