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CGS-CIMB downgrades Nanofilm to 'reduce' with lower TP of $1.13

Felicia Tan
Felicia Tan • 3 min read
CGS-CIMB downgrades Nanofilm to 'reduce' with lower TP of $1.13
The company may report a loss for its 1HFY2023 results, notes analyst William Tng. Photo: Albert Chua/The Edge Singapore
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CGS-CIMB Research analyst William Tng has downgraded Nanofilm Technologies to “reduce” from “hold” previously with a lower target price of $1.13 from $1.57 before.

In his June 21 report, Tng notes that Nanofilm may report a loss for its results for the 1HFY2023 ending June 30.

This comes after one of its clients, Foxconn, stated that it expects its performance for the 2QFY2023 to decline on a y-o-y and q-o-q basis due to the “seasonal off-peak period” amid a transition between new and old products. The 1HFY2023 is also a traditionally slower period for Taiwanese tech manufacturers as major electronic vendors launch new products near the year-end holiday season.

Foxconn’s expected 2QFY2023 performance also comes off the high base seen in the 1HFY2022 which saw strong demand after the easing of the component shortage in FY2021.

Foxconn’s revenues for the months of February, March, April and May were down by 11.65%, 21.11%, 11.77% and 9.45% y-o-y respectively.

“Using Foxconn’s public statement and monthly sales data as a guide, we think Nanofilm’s revenue, which is dependent on the sales of consumer electronic products for which Foxconn is a key contract manufacturer, will likely be negatively affected in 1HFY2023,” Tng writes.

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The analyst is also expecting ongoing costs and demand slowdown to affect the company’s upcoming results.

Revenue fell by 40% y-o-y in Nanofilm’s 1QFY2023 business update. The company had also stated that it will invest in automation to reduce labour involvement and that there will be costs incurred as it restructures its labour force for further operational efficiency. Costs will also be incurred for its ApexTech joint venture and Vietnam expansion, said the company at the time.

To this end, Tng also expects Nanofilm’s outlook for the FY2023 to FY2025 to remain challenging given concerns over global economic growth prospects, which may lead to cautious spending from consumers till FY2024.

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On this, the analyst has slashed his revenue forecasts for Nanofilm’s FY2023 to FY2025 results by 16.0% to 24.8%, leading to a 28.3% to 40.0% decline in his earnings per share (EPS) forecasts for the same period.

His new target price is now based on a calendar year (CY) 2024 P/E of 14.3x, which is the average of its global and Asian peers, from 14.2x previously.

To Tng, upside risks include new order wins from customers as well as faster operational progress at JVs ApexTech and Sydrogen Energy in FY2024, which may lead to higher net profit contribution and strong demand upturn from customers.

High customer concentration and higher operating costs as Nanofilm expands into other countries and other businesses are potential downside catalysts.

As at 10.55am, shares in Nanofilm are trading 11 cents lower or 7.05% down at $1.45.

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