1H22: Results In Line; Optimistic Outlook With Focus On Growth. Upgrade to BUY
Nanofilm’s 1H22 adjusted PATMI of S$21m (+17% yoy) was in line, forming 27% of our full-year estimate. Revenue grew 15% yoy. Revenue of AMBU, its largest segment, grew by 11%, led by 3C products. Nanofilm is optimistic about the outlook of the markets it serves and believes its deep-tech solutions will address the business opportunities available. We maintain our target price of S$2.72 (20x 2023F PE). Upgrade to BUY as share price has corrected by c.50% since our initial downgrade.
• Results in line with healthy yoy adjusted PATMI growth. Nanofilm Technologies International’s (Nanofilm) reported adjusted PATMI of S$21m (+17% yoy) was in line, accounting for 27% of our full-year estimate. 1H typically accounts for close to 30% of fullyear earnings due to seasonality of strong year-end demand. The S$2m adjustment to PATMI was for COVID-19-related expenses that resulted from logistic restrictions.
• All BUs performing well, major breakthrough by Sydrogen. Nanofilm’s largest segment, Advanced Materials Business Unit (AMBU), recorded an 11% yoy growth and contributed 76% of revenue in 1H22, with 3C products contributing 76%. On the other hand, Sydrogen, Nanofilm’s hydrogen fuel cell JV with Temasek, achieved its maiden revenue in 1H22 with the provision of coating services for a customer. While Sydrogen has not contributed significantly, it has made a significant breakthrough. After being established in Jul 21, Sydrogen has set up and qualified two industrial scale mass coating lines with an annual coating capacity of 800,000 bipolar plates for a leading automobile client.
• Optimistic outlook and dividend increase of 10%. Nanofilm is optimistic about the outlook of the markets it serves and believes that its deep-tech solutions will address the business opportunities available in these markets, independent of the shorter-term macro trends. Nanofilm’s multiple growth avenues in different industries, which are driven by its deep-tech and BU structure, are in different phases of growth. In addition, Nanofilm’s 10% yoy increase in interim dividend to 1.1 S cents is also a signal of its confidence.
• Nanofilm remains focused on executing its growth strategy in the following key strategic areas and will provide the market with periodic progress updates: a) geographical diversification and coverage; b) new segments with capability and product expansion; c) JVs and M&As; and d) R&D and engineering product development. R&D efforts in new exciting areas are intensifying with pathways to commercialisation.
• Geographical diversification and coverage. In 2H22, Nanofilm will be expanding its coating services footprint with a coating facility in Osaka, Japan. It is currently in the midst of qualifying its advanced materials solutions with a customer for application on ceramic products.
• New segments with capability and product expansion. Nanofilm’s green technological solution, which has vast potential applications, has the capability to replace the environmentally damaging electroplating process. Sydrogen believes it has the best coating performance for bipolar plates used in fuel cells, as validated by its customers. It has also achieved significant progress with the qualification of two industrial scale coating lines, with strong interest from multiple global and domestic customers.
• We have reduced our earnings forecasts for 2022/23/24 by 7%/7%/7% after reducing our revenue forecasts by 5%/8%/8% to factor in potential disruptions in Shanghai plant due to the sporadic lockdowns in China. Our earnings estimates indicate yoy earnings growths of 16%/24% for 2022/23.
• Upgrade to BUY with an unchanged target price of S$2.72. We value Nanofilm based on an unchanged PEG of 1.0x (growth based on three-year EPS CAGR of 20% from 2021-24, down from 23% after our downward earnings revision). We roll over our valuation base year to 2023. Our target PE multiple of 20x 2023F PE is at a slight discount vs Nanofilm’s peers’ 21x 2023F PE.
• Nanofilm’s share price has fallen by c.50% since our initial downgrade on 17 Aug 21 when its share price was S$4.25. We believe its current valuation of 16.4x 2023F PE provides an attractive entry level.
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• Better-than-expected ramp-up of the nanofabrication business.
• New application in the advanced material segment such as automobile (bi-polar plate electrodes in fuel cells) and fast-moving consumer goods.