Nanofilm 1Q22 business update: Strong growth momentum
- Good start to year with all units registered growth in 1Q22
- Strong business pipeline for 3C segment with the easing of supply chain disruptions
- Minimal impact from recent lockdown in Shanghai; measures in place to mitigate inflationary cost pressures
- Maintain BUY with TP of S$4.12; expect strong earnings ahead
1Q22 Business Update
Good start to year with all units registered growth in 1Q22. 1Q22 revenue grew 27% y-o-y, with growth in all business units. Expect growth momentum to remain strong, supported by the strong pipeline of projects on the back of the easing of supply chain disruptions, barring any potential challenges, especially in China.
Segmental performance:-
1) Advanced Materials Business Unit (AMBU)
Strong business pipeline for 3C segment with the easing of supply chain disruptions. AMBU contributed 81% of the revenue in 1Q22 (79% in FY21), with the 3C segment contributing 63%. Growth in the 3C (Consumer Electronics, Communication and Computers) was mainly driven by the communications and wearable and accessories sub-segments, as the market is back to operating in a normalised cycle with the easing of the supply chain disruptions. Barring any potential challenges arising from the COVID-19 situation in China, business pipeline visibility is strong for the 3C segment with the easing of supply chain disruptions, as the group enters into its typical peak season in 2H22.
The other segments in the AMBU division contributed 17% of revenue in 1Q22, led by the Automotive segment. The group is seeing positive development for new applications in the Automotive segment, including fuel injection systems, battery connectors and other car parts.
2) Nanofabrication Business Unit (NFBU)
Tapping on the large addressable and fast-growing markets for sensors and lens. NFBU contributed 6% of revenue in 1Q22 (8% in FY21), led by the mass production of projects, which include the micro-lens array (MLA) project for wearables’ sensors and a Fresnel lens project for a leasing technology company. NFBU has a strong pipeline of projects for sensory components and lens from major leading global customers.
3) Industrial Equipment Business Unit (IEBU)
Riding on customers’ expanding capex and strong project pipeline. IEBU contributed 14% of revenue in 1Q22 (18% in FY21). IEBU is poised for growth, riding on the anticipated increase in industrial production of its customers, and the strong pipeline of projects which includes developing coating equipment with new designs and solutions for the solar energy industry.
4) Sydrogen
Production on track; maiden revenue contribution in 2H22. Sydrogen’s production lines have been qualified by an automotive OEM and initial production is on track, with maiden revenue contribution expected to be in 2H22. New production lines will be added progressively as demand increases.
Minimal impact from recent lockdown in Shanghai. The COVID-19 lockdown in Shanghai has affected the flow of logistics and labour but Nanofilm has so far been able to continue operations in a closed-loop manufacturing arrangement.
Measures in place to mitigate inflationary cost pressures. The impact of rising raw material costs is minimal as raw materials form a relatively small portion of the group’s cost structure. Higher raw material prices can also lead to greater adoption of the group’s technology, turning commoditised raw materials into advanced materials of higher value. To reduce the higher utility costs, the group is installing solar panels at its plants in Shanghai, while rising labour costs is mitigated by the use of automation to reduce direct labour input.
Outlook and Recommendation
Well positioned for growth. With investments made in the new Shanghai Plant 2, which is about double the size of Plant 1, and additional equipment to significantly boost the group’s long-term production capacity, Nanofilm is well positioned for growth. There is still a lot of room for expansion in Plant 2, which is not running at optimal capacity yet.
Strong earnings ahead. With the worst in supply chain disruptions likely behind us, we expect a strong earnings growth of 29% in FY22F, followed by another 17% in FY23F. Upside could come from: 1) Stronger momentum for the 3C segment, 2) higher contribution from the NFBU segment, and 3) successful entry into new segments. Growth is supported by a strong balance sheet with net cash of S$146m as at end-December 2021 and the new Shanghai Plant 2, which still has ample room for expansion.
No change in forecasts, maintain BUY with TP of S$4.12 on PEG valuation. Our TP of S$4.12 is based on the PEG valuation method, pegged to peers’ average of 1.16x. At the current PE of 22.6x for FY22F, the group is trading at c.-1.5SD of its average PE since listing in October 2020. Maintain BUY.