Analysts have cut their target prices on Nanofilm Technologies International MZH following its weaker-than-expected business update for the quarter ended Sept 30.
On Nov 8, the company, which provides coating services for manufacturers, reports revenue of $55 million for 3QFY2023, down 19% y-o-y, no thanks to weaker end consumer demand. This brings its 9MFY2023 revenue to just $129 million, down 29% y-o-y, which is 68% of consensus projections.
In his Nov 8 note, citing the company management, William Tng of CGS-CIMB says that Nanofilm's "key customer" is "seeing improvement in reducing its inventory levels" suggesting that demand might pick up.
For the coming FY2024, Nanofilm remains concerned over the outlook for the macroeconomic environment which could continue to dampen consumer electronics demand.
A coating joint venture in China, ApexTech, is experiencing slower than expected progress in undergoing customer qualification because of excess capacity on the part of that customer, notes Tng.
Meanwhile, there are multiple concurrent developments in different markets.
For example, it is exploring acquisitions in Europe to gain a foothold in the market too; in Vietnam, where it is setting up additional capacity, production could commence after next March. And Nanofilm is finalising a factory-in-factory arrangement with a partner to provide coating services in India to its key customer.
However, because of the muted demand outlook for the current 4QFY2023, Tng expects Nanofilm to see a light net loss of $0.7 million as gross margin is projected to drop by 9.7 points given the low utilisation rate.
Even as Nanofilm faces weak demand, it is continuing its investments in capacity and geographical expansion.
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Given the challenging business environment, Tng has cut his FY2024 and FY2025 revenue by 18.6 and 20.6%, and subsequently, earnings cut by 35 and 56% respectively.
Tng has kept his "reduce" call on the stock and also cut his target price from 91 cents to 75 cents, which is based on 12.1x FY2025 earnings.
For Tng, upside might come from new order wins as well as faster operational progress at ApexTech. Besides ApexTech, Nanofilm has another key joint venture, Sydrogen, which is in partnership with Temasek Holdings and focuses on the hydrogen economy.
On the other hand, potential de-rating catalysts are high customer concentration, and higher operating costs as it expands into other countries and other businesses.
For DBS Group Research's Ling Lee Keng, she notes that Nanofilm has various initiatives in place to drive growth. However, significant earnings contribution will only be seen in FY2025 onwards.
She warns that cost pressures will come from spending on new capacity in new markets, and that order momentum will be softer versus last year.
"Higher costs from the various initiatives to drive long-term growth are also expected to affect margins. The group would have to reach a certain scale before they can enjoy operating leverage," says Ling.
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She expects Nanofilm to remain profitable in FY2023 but taking into account near-term woes and slow order momentum, Ling has cut her target price from 88 cents to 83 cents - based on 20x FY2024 earnings - while keeping her "fully valued" call.
Nanofilm shares changed hands at 86 cents as at 11.24am, down 1.71% for the day and down 37.68% year to date.
