Following its initiation report on Nov 26, UOB Kay Hian Research has maintained its “buy” rating with a higher target price of $4.52 from $4.07 previously.
See: UOB Kay Hian initiates coverage on Nanofilm with 'buy', TP of $4.07
The company update dated Dec 10 comes after the brokerage hosted a conference call with NanoFilm’s Chief Financial Officer (CFO) Lim Kian Onn.
Analysts John Cheong and Joohijit Kaur says they value NanoFilm based on a higher price/earnings-to-growth (PEG) of 1.0x, up from 0.9x, as they narrow the discount to peers’ PEG from 25% to 17% given more analyst coverage and potential earnings upside from better-than-expected margins and new projects.
“Our target price implies a 38.7x 2021F price-to-earnings (PE). We believe its unique technology, superior net margins and sole supplier status for most of its major customers provides a strong competitive advantage and warrants a premium to peers,” they say.
Through the call, the analysts found three key takeaways that could contribute to the growth in the company’s share price.
Firstly, NanoFilm’s filtered cathodic vacuum arc (FCVA) technology is one that could open up opportunities in new markets.
The FCVA technology is the ability to deposit advanced materials on substrates at room temperature, unlike conventional coating processes where high temperature is required. This opens up the possibility for the use of materials that have lower melting points such as metals, plastics and rubbers that are generally cheaper materials.
Secondly, the analysts believe that NanoFilm has gained market share in the smartphone segment. This is evident through the company’s revenue growth from smartphones’ advanced materials segment. At 10.8% 2017 to 2019 compound annual growth rate (CAGR), NanoFilm’s revenue growth from the segment has outpaced that of its largest customer, customer Z’s smartphone sales at 1.1% FY2017 to 2019 CAGR.
“We expect this trend to continue as we understand the group’s market share (% of total addressable market for surface solution for smartphones) is still relatively small,” say the analysts. “Furthermore, the recent launches of 5G-enabled smartphones could spark: a) a meaningful upgrade cycle; b) a premiumisation trend; and c) a change in design language which could lead to a growing involvement for surface solution providers such as NanoFilm.”
“The group should also benefit from organic growth in the wearables & accessories market, which has a relative low penetration rate and is expanding rapidly. We highlight that smart watch market leader Customer Z’s wearables, home and accessories revenue has grown at a FY16-19 CAGR of 30%,” they add.
Thirdly, Cheong and Kaur foresee NanoFilm’s second plant located in Shanghai to support its growth.
“The group has in the past, increased production capacity in tandem with revenue growth. Similarly, in order to provide additional production capacity to support the group’s push to gain market share for the next few years, NanoFilm is in the midst of constructing its second Shanghai plant,” they say.
The plant, which is expected to be fully operational by end 2021, will be able to house 200 more coating equipment, which would potentially increase its total number of coating equipment by 2.6x from 122 as at 1H2020 to up to 322 units.
To this end, the analysts predict a “potentially robust 2HFY2020” for the company.
“As customers in the computer, communications and consumer electronics (3C) industry prepare for product launches ahead of the holiday season in December, demand for the group’s surface solutions and nanoproducts generally tend to ramp up in July, and such heightened demand would last until December,” they say.
“As such, the group typically enjoys significantly better results in the second half of the year (2H19 earnings formed 68% of full-year earnings). As its key client (customer Z) has recently launched a series of new products (smartphones, wearables & accessories and tablets), we anticipate a similar seasonality trend for 2HFY2020. With that, we expect 2020 core earnings (ex-listing expense) to grow by 59.5% y-o-y,” they add.
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In their initiation report dated Dec 11, CGS-CIMB analysts William Tng and Darren Ong have started NanoFilm at “add” with a target price of $5.52.
This is based on 35.3x FY2022F earnings per share (EPS) that’s supported by 35.3% EPS growth over FY2019-FY2022F and sustainable net profit margin given its sole supplier status/proprietary technology moat.
“Post FY23F, we think wearables could sustain 30% net profit growth for NanoFilm. Our FY2022F net profit forecast is 12% above Bloomberg consensus,” say the analysts.
The company is the only one to offer FCVA coating technology around the world on a commercial scale as at Oct 23.
Against conventional coating technologies, its offerings provide greater functional and cosmetic advantages and is also environmentally-friendly.
“NanoFilm’s patented technology (key patents’ expiry range from 2025-2039) lends confidence to our 30% average net profit margin driving net profit growth of 21.8-60.7% over FY20-22F,” say Tng and Ong.
The strong growth in smartwatches, which grew 20% globally y-o-y in 1H2020 could also benefit the company, note the analysts. “We think strong demand for smartwatches will sustain the high growth momentum of its wearables business. We expect a replacement cycle to drive Microsoft Surface tablet sales (benefitting sole coater of the Surface tablet logos, NTI).”
“NTI is also the sole coater for 90% of its major customers as at Oct 23, including being the sole supplier of Fresnel lenses (used in smart phones) for certain models for customer Z. Other long-term growth drivers include demand for coating in automotive piston rings and consumer electronics,” they add.
Shares in Nanofilm closed 53 cents higher or 13.6% up at $4.43 on Dec 14.
