Results First Take: Weak 1H21 due to higher expenses relating to new plant and new projects

  • Weak 1H21 results due to higher expenses relating to new plant and new projects
  • Expect a stronger 2H due to seasonality factor, new plant and some new products coming onstream 
  • Well-positioned for multiple avenues of growth, supported by a strong balance sheet 
  • We currently have a BUY call with TP of S$6.22 under review

1H21 results miss on higher expenses relating to new plant and new projects. Nanofilm reported a 24% y-o-y increase in revenue to S$96.6m, led by the group’s Advanced Materials Business Unit (AMBU) and Industrial Equipment Business Unit (IEBU). Net profit of S$18.5m was 2.3% lower y-o-y, dragged by increased expenses of 1) S$2.6m related to the new Shanghai Plant 2 (utility, facility management, manpower additions and training costs) and equipment qualification costs to enable production; 2) New Product Introduction (NPI) cost of S$2.8m involving new projects yet to reach mass production and contribute materially to the group and 3) Product mix, where projects of lower average margins were executed in 1H2021.

Overall, 1H21 revenue and net profit only account for 31%/21% of our full year numbers, below expectations. 1H20 accounted for 36%/32% of revenue and net profit respectively.

A lower interim DPS of 1Sct was declared, vs 1.9Scts in 1H20.

Segmental Breakdown

 AMBUIEBUNFBU
Revenue (S$m)76.020.81.8
y-o-y change+18%+81%-48%
Adjusted EBITDA (S$m)28.25.9-0.9
y-o-y change-4%+67%n.m.
Adjusted EBITDA  margin – 1H2137.2%31.1%-54.3%
Adjusted EBITDA margin – 1H2045.9%33.8%7.3%

AMBU – The 18% increase in revenue was mainly due to contributions from 3C and Automotive product sub-segments. Adjusted EBITDA margin was lower y-o-y, attributable to changes in the product mix and incurred expenditures in relation to equipment qualification costs, and new product introduction costs.

IEBU – The 81% surge in revenue and 67% % rise in EBITDA were attributable to higher sales of customized industrial equipment to the customers.

NFBU (Nanofabrication) – The negative EBITDA was due to end of life of projects resulted in drop in revenue quicker than expenses reduction.

Key Operating Data

 1H201H21
AMBU  
Coating equipment (no.)122186
In-line coating equipment (no.)44
Equipment utilisation (%)73%61%
IEBU  
Equipment produced (no.)2316
Equipment sold (no.)46
Equipment used internally (no.)1910
NFBU  
Injection molding equipment (no.)1313
Utilisation (%)30%11%

Source: Company: DBS Bank

 In 1H21, the AMBU saw an increase of 64 coating equipment to 186 units, in preparation for demand as the group’s business continues to scale. This resulted in lower utilization rate of 61% in 1H21 compared to 73% in 1H20. Utilisation rate at the NFBU dropped to 11% in 1H21 due to project end of life.

Expect a stronger 2H. Besides the seasonally strong 2H especially for 3C (computer, communication, consumer) products, the new Shanghai Plant 2, which has been operational from February 2021and expected to be fully operational by end-2021, should also help to boost production. The production space of this new plant (66,406 sqm) is bigger than the group’s current space of c.44,000 sqm. Furthermore, the group is also working on a number of NPI projects, which should be in mass production soon.

Well-positioned for multiple avenues of growth. In the medium to longer term, Nanofilm is well-positioned for multiple avenues of growth, supported by a strong balance sheet with net cash of S$189m. Growth could come from existing products and industries, and also penetration of new markets. 

 One of the latest initiatives is the entry into the hydrogen economy. The application of Nanofilm’s technology in the development of protective carbon coatings for metallic bipolar plates of fuel cells offer many advantages as compared to the conventional method, which are costly and less effective. Promising areas of applications include passenger and commercial automotive, light powered mobility solutions and stationary power. Target markets include China, whereby the government policies strongly support the development of a hydrogen economy starting with fuel cell electric vehicles.

Expect share price weakness. We could see some knee-jerk reaction on the back of this set of weak results. Furthermore, the recent change in management could be another negative factor. Chief Operating Officer, Mr Ricky Tan Chong Ho, who is involved in the management and control of the group’s international business operations has quit. His resignation is less than two months after the resignation of CEO Mr Lee Liang Huang due to health reasons. The group has already appointed Dr Shi Xu, the founder and Executive Chairman, as the interim CEO.

 More updates after results briefing on Monday. 

We currently have a BUY call with TP of S$6.22 under review.