Nanofilm Technologies - DBS Research 2023-02-03: Addressing Short-Term Struggles

• NanoFilm Technologies (SGX:MZH) expects to report a decrease in revenue of approximately 4% y-o-y for FY22, and a decrease in net profit after tax and minority interest (PATMI) of approximately 30% for FY2022 – see NanoFilm's announcement on profit guidance dated 02 Feb 2023. This implies revenue of about S$237m and net profit of S$44m. The guidance is below ours and market consensus. This guidance also implies a much weaker 4Q22 as compared to 3Q22.
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• Increased operating expenses arising mainly from higher salary expense due to increased headcount, as well as higher depreciation expense due to capital investments for future growth;
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• The easing in China’s zero-COVID-19 policy in December 2022 which resulted in a spike of infections that interrupted the group’s operations; and
• Softer end-consumer demand, especially for consumer electronics, due to recessionary fears. The 3C segment typically contributes about 60% to total revenue for the group.
• The guidance also implies a lower net margin of ~18.6%, vs 25.2% for FY21, mainly attributable to one-off costs of approximately S$2.5m related to COVID-19 restrictions, and a net loss of approximately S$1.6m incurred by its subsidiary, Sydrogen.
• As NanoFilm continues to invest for future growth, costs, including depreciation, labour costs and overhead costs are expected to be high while revenue could take time to come in. Hence, we are expecting margins to remain weak in 1H23. We are hopeful that margins could improve in 2H23 on economies of scale as revenue for 2H is typically higher than 1H.

What are the catalysts ahead for Nanofilm?

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Lee Keng LING DBS Group Research | https://www.dbs.com/insightsdirect/ 2023-02-03 SGinvestors.io

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