UOB Kay Hian has maintained its “buy” call on Nanofilm, but with a lowered target price of $2.67 from $3.90 previously.
The brokerage says it expects Nanofilm to deliver earnings of $47 million for its 2HFY2021 ended Dec 31, 2021 - vs $18 million in 1HFY2021 with the easing of supply chain issues and seasonally stronger demand.
Citing Nanofilm’s Dec 2021 update statement, UOBKH notes that the company's advanced material business unit (AMBU) has seen a rebound for its consumer electronics, communication and computers (3C) sub-segment, following the commencement of its peak period in 4QFY2021.
AMBU is Nanofilm’s largest segment, which contributed around 82% of its 9MFY2021 revenue.
“This momentum is expected to be carried into 1QFY2022. Beyond 3C, the other segments including automotive, precision engineering and printing & imaging continue to deliver strong growth, driven by the increasing adoption of Nanofilm’s greener and functional advanced materials solutions," says UOB KH.
However, UOB KH says it opts to “remain cautious” on the stock, as its expects Nanofilm to incur higher manpower and production costs geared for future growth. “These additional costs may limit near-term earnings growth in our view.”
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In addition, despite a 23% correction of Nanofilm’s share price y-t-d, the brokerage points out that its 2022 price to earnings (P/E) multiple of 24x is a significant premium to its peers in Singapore at 12x, and as such, could cap the stock’s upside in a rising interest rate environment.
Elsewhere, UOBKH also notes that the potential continued disposal of shares by a substantial shareholder could be an overhang for Nanofilm’s stock price.
US-based Capital Group of Companies recently cut its to 4.91% on Jan 17, therefore ceasing to be a substantial shareholder of the company. It was one of the cornerstone investors at Nanofilm's 2020 IPO with a stake then of more than 6%.
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Moving forward, UOB KH highlights Nanofilm’s efforts to diversify its customer base by entering new industries, adding that aside from its largest key customer, revenue contribution from other customers has increased from 33% to 39% y-t-d.
Furthermore, development efforts in new areas are intensifying with pathways to commercialisation.
These areas cover multiple transformational fields, such as new classes of advanced materials through greener and sustainable composites, as well as engineered optics for virtual reality and augmented reality.
This is in addition to hydrogen fuel cell technologies and components, which it announced in July 2021. Nanofilm had signed a definitive agreement with Temasek to form a joint venture, Sydrogen Energy, to create products to be used in the growing hydrogen economy.
As at 12.35pm, shares of Nanofilm traded at $2.93, with UOB KH forecasting an FY2021 price to book ratio of 4 and a 0.7% dividend yield.
