After weak 1HFY2021 results and the departure of key executives, Nanofilm Technologies has seen better days, with investor confidence now dented, writes DBS Group Research analyst Ling Lee Keng.
Ling is downgrading the company to “hold” while cutting the target price to $4.18 from $6.22 previously. The new target price represents a 2% downside.
“Nanofilm’s 1HFY2021 results were affected by operational issues and also supply chain disruption, which has affected its key customers. This also resulted in a lower-margin product mix. Coupled with the uncertainties surrounding the recent resignation of two key executives, which has dented investor confidence, we downgrade the stock to 'hold',” writes Ling in an Aug 17 note.
“We prefer to wait for more clarity on the leadership front before we turn buyer again,” she adds.
Nanofilm Technologies International’s COO Ricky Tan Chong Ho quit last week, less than two months after CEO Lee Liang Huang resigned.
As cited in Nanofilm’s IPO prospectus, Tan joined the company as senior vice president for operations on May 11, 2020 and was re-designated as COO on Aug 1, 2020.
In a Singapore Exchange (SGX) filing on Aug 13, Nanofilm, which achieved unicorn status with its hotly anticipated IPO last year, explains that there was a reorganisation of its reporting structure and assigned responsibility to oversee the overall operations of each business unit.
Nanofilm announced that revenue for its 1HFY2021 was up 24.2% y-o-y to $96.6 million. However, its profit margin was down 5.1 percentage points to 18.7%, because of costs incurred for a new plant in Shanghai, new product introduction costs and also because the projects executed in 1HFY2021 happened to be of lower margin types.
See: Nanofilm's COO quits, less than two months after CEO; earnings down 3.1% on plant expansion costs
See also: Nanofilm not looking for COO replacement; eyes better second half
As such, its earnings for its 1HFY2021 was down 3.1% y-o-y to $17.9 million.
Ling expects a stronger 2HFY2021, but the supply chain disruption remains a concern. “Though 2HFY2021 would be a much stronger half, especially for computer, communication, and consumer (3C) products, the component shortage issue remains a concern… Growth could come from existing products and industries and also penetration of new markets, supported by a strong balance sheet with net cash of $189 million as at end-June 2021.”
Meanwhile, CGS-CIMB Research analysts William Tng and Darren Ong think COO Tan’s departure has “minimal impact”, with demand still strong with new projects in the pipeline.
In an Aug 16 note, Tng and Ong are maintaining “add” on the company, though with a lowered target price of $5.05 from $5.52 previously. The new target price represents an 18.9% upside.
“We understand from management that there were little to no impact to its business operations as its three business units (BU) are now individually headed by a BU Head. Nanofilm does not intend to reappoint a new COO and does not foresee further departures of its key executives,” write Tng and Ong.
Tng and Ong note that Nanofilm’s 1HFY2021 PATMI was lower than expected, primarily due to supply chain risks, which caused major "Customer Z" (accounting for over 50% of 1HFY2021 revenue) to prioritise its flagship smartphones for components, for which Nanofilm provides decorative coating. This resulted in lower gross margins compared to functional coatings for wearables and computers subsegments.
“According to our checks, Customer Z continues to expect strong demand for its products but acknowledges tight supply constraints for its smartphones and tablets. Nanofilm is preparing for a production ramp-up in anticipation of strong demand from Customer Z’s new product launch in 2H2021F, but execution is key, in our view,” they write.
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Tng and Ong also add that in 1HFY2021, Nanofilm announced it is close to securing two new projects for its nanofabrication BU, namely the micro lens array for a new smart watch series, of which it is one of two suppliers to its customer; and for optical sensors, of which it is a single source supplier.
As at 12.03pm, shares in Nanofilm are trading 23 cents lower, or 5.41% down, at $4.02. According to DBS’ Ling, this is some 46.1 times the 2021F price-to-earnings ratio (P/E) forecast.
