Focusing on long-term growth

■ We think Nanofilm’s 4Q21F was likely better than 3Q21 as production picked up pace.
■ Our previous revenue expectations for FY21-23F may need to be lowered for now pending stronger growth recovery for its customers.
■ We also think Nanofilm will continue to see higher operating expenses as it spends to prepare the company for future growth.

Higher operating expenses; 4Q21F likely rebounded

We note that in FY21F, operating expenses were generally higher as Nanofilm added headcount, new equipment and faced qualification costs to meet customers’ requirements. Typically, the third quarter is the busiest quarter; however in FY21F, the company’s fourth quarter was the busiest due to supply chain disruptions. Nanofilm expects some of the production scheduled for 4Q21F to spill into 1Q22F. For its Nanofabrication Business Unit (NFBU), mass production at its first micro‐lens array (MLA) project for its customer’s new‐generation wearables has commenced and the company expects positive contribution from NFBU in 4Q21F and beyond as there are other new projects under development.

Aiming for long-term growth; R&D spending to continue

The group also updated that it will be accelerating its efforts to develop core technologies and new product offerings. Over the last three financial years, Nanofilm has incurred approximately 5.9% of revenue per year in R&D and engineering expenses. The group’s target spend on R&D is more than 5.0% of revenue. As an update, Nanofilm has also highlighted that it is involved in the development of engineered optics for virtual reality and augmented reality glasses.

Adjusting our expectations

While Nanofilm continues to prepare the company for long-term growth, our previous FY21-23F revenue expectations may take longer to be realised. Hence, we have reduced our FY21-23F revenue by 3.3-5.6% and in line with the company’s long-term growth plans, we have also raised our operating expenses assumptions for FY21-23F.

Rolling to FY23F

We roll over our valuation to FY23F. Our FY21-23F EPS forecasts are reduced by 5.0- 8.5%. Our FY20-23F EPS CAGR is 22.25% and a target P/E of 22.25x will translate into a P/E-to-growth ratio of 1.0x. We ascribe a 15% premium to this multiple (for its potential growth prospects and proprietary technology) and value the company at 25.59x FY23F EPS, leading to a lower TP of S$3.92 (previously S$4.02 using 30.44x FY22F EPS). Rerating catalysts include new order wins from customers/market share gains. Downside risks are customer concentration/persistent component shortages, and an inability to find uses in new verticals for its coating solutions.