DBS Group Research analyst Ling Lee Keng has upgraded her recommendation on Nanofilm Technologies to “buy” from “hold” ahead of the supply chain recovery.

Ling has also upped the counter’s target price estimate to $4.96 from $4.05, representing a 24% upside to its last-closed price of $3.99.

The higher target price is pegged to a higher price-earnings-to-growth ratio (PEG) of 0.92 times from 0.75 times before. This is still at a discount to Nanofilm Technologies’ peers on FY2022 earnings, according to Ling.

This is due to the supply disruption not being out of the woods yet, despite showing some signs of improvement, she says.

The way Ling sees it, Nanofilm’s share price should “break out” as the company brings in stronger earnings in the 2HFY2021 and 44% earnings per share (EPS) growth in FY2022 as the supply chain recovers.

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Ling is also positive on the company amid the growing adoption of nanotechnology.

Nanofilm is well-positioned to see multiple avenues of growth in the medium-term, she notes.

Growth could come from its existing products and industries as well as the penetration of new markets including the hydrogen economy.

It is also bolstered by a strong balance sheet with net cash of $189 million as at end-June.

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To this end, Ling deems Nanofilm should see a “more broad-based improvement” in the 2QFY2021. “The situation should normalise in 2023,” she writes in a report dated Dec 9.

In August 2021, the company’s share price fell by 30% due to a miss in earnings expectations, well as the resignation of its key executives.

To Ling, the worst may be over for the company as 3QFY2021 “could be the worst quarter on the supply front”. Nanofilm’s earnings should also recover going forward, she adds.

“Overall, we expect the growth for Nanofilm this year due to the supply disruptions to be delayed to next year. Firm earnings execution should also help allay market concerns over the management team,” she says.

That said, key risks to the company include its ability to “establish, maintain, and protect its proprietary intellectual property rights”. The resurgence of the Covid-19 pandemic, which may further aggravate the supply chain, also poses as another key risk, says Ling.

As at 2.02pm, shares in Nanofilm are trading 14 cents higher or 3.51% up at $4.13, or an FY2021 P/B of 5.5 times and dividend yield of 0.4%.

Photo: Albert Chua/The Edge Singapore

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