Buy ahead of supply chain recovery

  • Upgrade to BUY with higher TP of S$4.96 on anticipated supply chain recovery  
  • Stronger earnings execution should help the stock to re-rate and break out
  • Expect smartphone segment to register strong growth; wearables to recover from weak 3Q21
  • Growth for Nanofilm to outpace industry on market share gain and extension of product range

Investment Thesis:

Earnings execution and recovery from 2H21 to drive share price recovery – upgrade to BUY! Nanofilm’s share price fell by 30% in August on earnings miss and resignation of key executives but we believe the worst is over as 3Q21 could be the worst quarter on the supply front and earnings should recover going forward. We expect share price to break out as the company delivers stronger earnings in 2H21 and 44% EPS growth in 2022 as the supply chain recovers, coupled with the increasing adoption of nanotechnology. 2Q22 should see more broad-based improvement and the situation should normalise in 2023. Overall, we expect the growth for Nanofilm this year due to the supply disruptions to be delayed to next year. Firm earnings execution should also help allay market concerns over the management team.

Well positioned for multiple avenues of growth in the medium term. Growth could come from existing products and industries and also penetration of new markets, including the hydrogen economy, with maiden contribution expected in 2022. Growth is supported by a strong balance sheet with net cash of S$189m as at end June 2021, and the new Shanghai plant 2 which still has ample room for expansion.

Valuation:

Higher TP of S$4.96 on PEG valuation. Our TP is raised to S$4.96 (previously S$4.05), pegged to a higher PEG of 0.92x (vs 0.75 previously), which is still at a discount to peers on FY22F earnings, as the supply disruption situation, although shows some pockets of improvement, is not out of the woods yet.

Where we differ:

We value the stock on a PEG methodology, vs the conventional PE method, to capture the strong growth potential going forward.

Key Risks to Our View:

Ability to establish, maintain, and protect its proprietary intellectual property rights; Resurgence of COVID pandemic further aggravating supply chain.