Nanofilm Technologies - Downgrade To HOLD As Outlook Worsens
- Post the release of NanoFilm Technologies (SGX:MZH)'s 9M22 update on 3 November 2022, 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, vs our earlier expectations of a gradual improvement.
- Similar to 3Q22, we expect 4Q22 to be another weak quarter y-o-y.
- In the last two years, 2H typically accounts for ~60% of total revenue. For 9M22, NanoFilm registered revenue growth of 10% y-o-y. 1H22 saw revenue growth of 15% y-o-y.
Disruptions to supply chain affecting the smartphone segment.
- The customer's factory in Zhengzhou, which supplies the bulk of the smartphone products for NanoFilm, has been operating at a significantly reduced capacity due to the COVID-19 restrictions in China. Hence, revenue contribution for this segment is expected to be lower.
- In terms of other product segments from this same customer, wearables are expected to be stable, supported by new product launches, whereas the computer division is weak, affected by macro headwinds.
- Overall, the 3C segment, which typically contributes > 60% to NanoFilm's total group revenue, could continue to see demand weakness in 2023. According to data from Gartner, phones, PCs, and tablets are projected to be back on the growth path only in 2024.
Industrial equipment segment affected by cuts in customers’ capital expenditure.
- The industrial equipment segment, which contributed 18% (S$45m) to NanoFilm's total group revenue, is expected to be adversely affected by the cut in its customers’ capital expenditure amid the increasing macro uncertainties.
Exploring new initiatives to drive growth.
- NanoFilm has been able to increase market share and wallet share for some of the products, especially for new launches where the group is the sole source for certain parts. In order to break through better, NanoFilm is exploring various new initiatives to drive growth. However, this takes time to develop.
Medium to long-term strategies still in place.
- Despite the near-term challenges, NanoFilm has put in place various strategies, including the entry into the energy segment (hydrogen fuel cell, advanced EV battery, and solar cell) and the expansion into Vietnam with a mega site similar in size to its China facilities, to drive growth ahead.
- NanoFilm targets to achieve revenue of S$500m and net profit of S$100m, implying a 2021-2025 CAGR of 19% for revenue and 13% for net profit.
Cut Nanofilm's earnings by 16% to 17% on worsening outlook; downgrade to HOLD.
- On the back of the worsening near-term outlook, which could delay growth, and given that significant contributions from the new initiatives can only come in from 2024 onwards, we have lowered our FY22 to FY24 earnings projections for NanoFilm by 16% to 17%.
- Downgrade NanoFilm to HOLD with lower target price of S$1.39 (previously S$2.22).
- Our target price for NanoFilm is pegged to a lower P/E of 15x, ~-1.5 standard deviation of its average P/E, on FY23F earnings, given the near-term uncertainties.
Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.
Lee Keng LING DBS Group Research | https://www.dbs.com/insightsdirect/ 2022-11-18 2022-11-18
Previous report by DBS Research:
2022-11-04 Nanofilm Technologies - Weaker-Than-Expected Revenue Growth For 9M22; Growth Strategies In Place
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