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Broker's Digest: Nanofilm Technologies International, ESR-LOGOS REIT, Japan Foods Holding

The Edge Singapore
The Edge Singapore11/27/2022 03:13 AM GMT+08  • 8 min read
Broker's Digest: Nanofilm Technologies International, ESR-LOGOS REIT, Japan Foods Holding
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Nanofilm Technologies InternationalPrice target:

UOB Kay Hian ‘sell’ $1.92

Further downgrade on weak results

UOB Kay Hian analyst John Cheong downgraded his call on Nanofilm Technologies International to “sell” on Nov 22. The analyst’s downgrade comes just weeks after Nov 4 when he first downgraded the counter to “hold” from “buy”.

The most recent downgrade comes as Cheong expects Nanofilm to report a “weak” set of results for the upcoming 4QFY2022 ending Dec 31.

In his latest report, the analyst slashed his target price by a further 43% to $1.02 from $1.79 previously. He also expects to see the company’s 2HFY2022 earnings decline by 30% y-o-y due to the disruption of Foxconn’s production in China. Headquartered in Taiwan, Foxconn is the world’s largest technology manufacturer and service provider.

See also: Analysts remain 'neutral' on StarHub; Maybank downgrades to 'hold' after FY2022 results

In early November, Nanofilm’s largest customer, which Cheong referred to as “Z”, reduced the shipment forecasts of its newest iPhones after the lockdowns in China affected the operations of its suppliers in the country. Foxconn’s factory in Zhengzhou, which operates the world’s biggest factory for Customer Z, underwent a seven-day lockdown on Nov 2 due to the high number of Covid-19 cases.

“The list of high-risk areas included Foxconn’s Zhengzhou plant, which implies that the flow of goods and people in and out of the main production base remains affected,” Cheong notes. “Market researcher TrendForce also recently cut its iPhone shipment forecast for [the period from] October [to] December by two to three million units to between 77 million and 78 million from 80 million, due to the factory’s troubles.”

Nanofilm’s industrial equipment business unit (IEBU), is also expected to remain “weak” in the near term as its customers, which purchase coating machines, are likely to delay and cut their capex amid increasing macro uncertainties. In addition, currency weakness across many countries has caused purchases to become more expensive for its IEBU customers, especially those located in Japan, notes Cheong.

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IEBU is Nanofilm’s second-largest segment, contributing around 13% to the company’s total revenue in the 9MFY2022.

The analyst is anticipating that expected lower production for the 2HFY2022 may drag margins for the half-year period. This is despite the fact that the 2HFY2022 is seasonally stronger for the company, typically contributing around 60% of its full-year revenue and 70% of its full-year earnings.

Furthermore, Nanofilm’s subsidiary, Sydrogen, should continue to be loss-making in FY2022 and FY2023.

On this, Cheong has lowered his earnings forecasts for FY2022, FY2023 and FY2024 by 19%, 17% and 13% respectively after reducing his revenue forecasts by 8%, 8% and 7% respectively. The lower revenue forecasts have factored in the potential disruptions in Nanofilm’s customers’ productions due to the sporadic lockdowns in China.

“We have also reduced our gross margin assumptions for FY2022/FY2023/FY2024 by 3.4%/2.2%/1.7% to 50.4%/49.5%/49.0%. This is to reflect the lower operating leverage and higher start-up costs of new projects. Our earnings estimates indicate y-o-y earnings growths of -16%/18%/22% for FY2022/FY2023/FY2024,” Cheong writes.

Cheong’s latest target price values Nanofilm based on FY2023 earnings per share (EPS) of 11x, pegged to –2 standard deviations of its long-term forward mean. This is to “reflect the challenging environment it is facing, which could lead to further de-rating of its P/E multiple,” the analyst says.

“Nanofilm’s FY2023 P/E of 14x is still at a premium versus [its] Singapore peers, which are trading at [an] FY2023 P/E of 9x,” he points out. — Felicia Tan

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Price target:

RHB Group Research ‘buy’ 46 cents

Lower TP despite rejuvenation efforts

RHB Group Research analyst Vijay Natarajan has kept “buy” on ESR-LOGOS REIT (E-LOG) as the REIT’s portfolio rejuvenation continues.

After the merger, E-LOG has made a series of divestments at a premium and redeploying it into high-quality Japanese freehold logistics assets.

Year to date, the REIT manager has divested five assets totalling some $155 million at an estimated 15% premium to their latest valuations.

In the coming quarters, the REIT manager says it expects more divestments with an additional $400 million worth of assets identified for divestments in the next one to two years. The proceeds from the REIT’s recent divestment will be used for its maiden Japanese acquisition of ESR Sakura Distribution Centre, in Chiba, Tokyo, for JPY17.8 billion ($183.5 million).

To Natarajan, these moves are part of E-LOG’s efforts to refresh its portfolio by divesting noncore assets on shorter leases and adding good quality freehold assets from a visible sponsor pipeline of US$2.0 billion ($2.76 billion).

“Management remains confident that based on its forward demand and discussions with tenants, it expects it to remain at mid-single digit levels next year,” Natarajan writes.

“Occupancy, though, dipped slightly in 3Q mainly on the back of redevelopment plans but remains healthy at 92.4%. Asset enhancement initiatives (AEIs) and redevelopment are progressing in the right direction with the REIT achieving full occupancy for revamped 19 Tai Seng Avenue and 53 Pengerine Drive (increase in gross floor area or GFA). The yield on cost for AEIs ranges from 6% to 8%,” he adds.

After its recent divestments and acquisition, the REIT’s gearing is expected to stay at around 40%. About 66% of its debt is hedged with every 50 bps expected to cause a DPU impact of 2%.

The REIT currently has about $390 million, or 20%, of debt due in 2023, a large part of it due for refinancing in the 4QFY2023.

In his report dated Nov 21, Natarajan lowered his target price to 46 cents from 53 cents. The analyst has also lowered his estimates for FY2023 and FY2024 by 8% after factoring in divestments and higher interest costs for the REIT’s debt and perpetual securities.

In early November, the REIT announced that it would not be redeeming its $150 million worth of perpetual securities. The perpetual securities would be extended and reset to a higher coupon rate of 6.632% per annum (p.a.) from 4.6% previously.

“The move will result in [a] $2.0 million p.a. increase in payout and is not surprising considering the challenging perpetual securities market conditions and alternatives,” Natarajan notes.

The analyst’s cost of equity (COE) is also raised by 60 basis points to reflect the rising interest rate environment, he says.

“Operationally [E-LOG’s] assets remain well positioned — with positive rent reversions and high occupancy — but this will not be enough to offset an increase in interest costs (66% hedge) and reset of perpetual securities interest,” Natarajan writes. — Felicia Tan

Japan Foods Holding

Price target:

RHB Group Research ‘buy’ 60 cents

Beneficiary of reopening, stellar results

RHB Group Research analyst Shekhar Jaiswal has reiterated his “buy” call for Japan Foods Holdings with a higher target price of 60 cents from 55 cents previously.

In his Nov 18 report, Jaiswal highlights that the easing of Covid-19 measures since early 2022 was an inflexion point for Singapore’s F&B industry which saw Japan Foods booking “stellar earnings” for 1HFY2023 ended September.

In 1HFY2023, the company’s revenue increased by 80% y-o-y to $38 million and reversed into profitability with earnings of $2.3 million, compared to a loss of $1.6 million in the same period last year.

Revenue and reported earnings accounted for around 55% and 65% of his estimates respectively, while the company’s gross margin widened to 84.7% from 83.8% in 1HFY2022, despite the inflationary environment. To manage the rise in input costs, Jaiswal says Japan Foods is gradually passing on higher costs to customers by raising its prices and that he has increased his FY2023 to FY2025 earnings by 7% to 9%.

For Jaiswal, this makes for a “compelling” valuation. “We believe Japan Foods’ FY2024 P/E of 15x does not do justice to our expectation of its strong return to pre-pandemic profitability. On an ex-cash basis, the stock is trading at 12x FY2023 P/E, which is quite compelling,” he says, noting that his TP was derived without any ESG premiums or discounts to the stock’s intrinsic value.

“In addition to the strong revival of its revenue and profits, we are upbeat on its recent expansion into halal restaurant brands and believe that the company has the potential for significant growth. We expect strong growth over FY2023 to FY2025, with profit quickly reverting to pre-pandemic levels despite rising cost inflation,” Jaiswal adds.

Japan Foods has doubled the number of its Halal restaurants from six in 1HFY2022 to 12 in 1HFY2023, while also expanding its portfolio of halal brands to five as at October. The analyst notes that the revenue contribution from halal restaurants has also increased over the last year — this segment accounted for 25.2% of total revenue in 1HFY2023.

Meanwhile, Jaiswal says that the company will look to expand into Japan. “As at end 1HFY2023, Japan Foods had no borrowings and a cash balance of $23.5 million or 30% of its market cap,” he says.

Japan Foods declared a 1 cent interim DPS for 1HFY2023, compared to 0.5 cents for 1HFY2022, although Jaiswal notes the company has historically maintained a high dividend payout ratio — for FY2018 to FY2020, its dividend payout ratio stood at 68% to 214%.

“Japan Foods announced that 100% of net profit would be paid as dividends in FY2022, which we expect it to maintain in the forecasted years. We also estimate its dividend yields at more than 5% for FY2023 to FY2025,” he notes. — Bryan Wu

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