Negative Profit Guidance Due To Challenging Environment; Downgrade To SELL
Nanofilm guided that its upcoming 1H23 results will report a net loss of around S$8m on the back of a 34% yoy revenue decline, due to a more challenging environment which has led to weaker end-consumer demand and a soft recovery in China. Also, Nanofilm has deferred its 2025 earnings target of S$100m until there is better visibility. As a result, we trimmed our 2023/24 EPS by 35%/31%. Our target price fell by 31% to S$1.11 (18x 2024F PE). Downgrade to SELL.
WHAT’S NEW
• Negative profit guidance for 1H23. Nanofilm Technologies International (Nanofilm) released its profit guidance for 1H23 on 10 Jul 23. Based on preliminary assessment, Nanofilm expects that it will report a 1H23 revenue decline of around 34% yoy to S$73m and a net loss of around S$8m (vs S$21m net profit in 1H22). However, it expects to report a positive EBITDA for 1H23.
• Weaker performance in 1H23 due to market-related issues. The weaker-than-expected performance is attributable to: a) slower-than-expected recovery in end-consumer sentiment linked to macro challenges, b). softer-than-anticipated post-reopening recovery in China during 1H23, c) weaker demand across the broader consumer electronics sector that has significantly impacted the Nanofilm’s Advanced Material Business Unit (AMBU), and d) increased operating expenses due to investments in long-term business initiatives, including new facility set-ups in Zigong and Huizhou, China and higher depreciation expenses from capital investments in new facilities.
• Expect 2H23 to be better vs 1H22 barring unforeseen circumstances. To mitigate the impacts of the challenging business environment, Nanofilm has implemented cost reduction measures in manpower, overheads, and other operating expenses. It expects revenue for 2H23 to be better hoh and to remain profitable for full-year 2023. However, given that the consumer market contributes a large portion of Nanofilm’s revenue, its outlook depends on the various key factors not worsening, such as global inflation, geopolitical tensions, consumer market demand and customer capex.
• Deferring 2025 revenue and earnings targets. Given the current challenging and unpredictable business landscape, Nanofilm will be deferring the attainment of its 2025 targets of S$500m in revenue and S$100m in profit after tax and minority interest, to a later time when there is better visibility. In the meantime, Nanofilm remains committed to pursuing its various outlined strategic initiatives.
STOCK IMPACT
• Challenging outlook and weaker guidance could lead to share price weakness. We think that Nanofilm’s share price could react negatively to this negative surprise and weaker-than-expected guidance, especially with the deferment of its 2025 revenue and earnings. Sentiment could only improve until there is clearer revenue and earnings visibility.
• Nanofilm’s business strategies include: a) the geographic expansion of production facilities (Nanofilm continues to enlarge and diversify its manufacturing footprint by expanding into new strategic locations. It has secured a new site in Osaka of approximately 900 sqm which is commencing renovation. It is also actively looking for a site in Europe to address market opportunities in the industrial segment); b) capability and product expansion in new segments (the nanofabrication business unit has expanded its optical and sensory solutions into new products lines for existing customers and the industrial equipment business unit has developed new product lines such as the Solar Cadmium Telluride inline system and Diamond-Like-Carbon coating equipment for the external market); and c) continued investment in R&D. Nanofilm continues to invest in R&D and innovation to develop technological breakthroughs for commercialisation, such as expanding its Green Plating solutions into three variants: a) Decorative (anti-corrosion, aesthetic coat), b) Power (anti-corrosion, conductive coat), and c) Power+ (anti-corrosion, conductive, hard coat).
EARNINGS REVISION/RISK
• We have reduced our earnings forecasts for 2023/24/25 by 35%/31%/32% after reducing our revenue forecasts by 18%/25%/32% to factor in the potential slowdown in end-consumer demand amid a challenging macro environment with geopolitical tensions, inflationary pressures and rising interest rates. We are also factoring in the negative profit guidance of Nanofilm which expects very weak 1H23 results. Our revised earnings estimates indicate yoy earnings growths of -44%/66% for 2023/24.
VALUATION/RECOMMENDATION
• Downgrade to SELL with a 31% lower target price of S$1.11. We value Nanofilm based on 18x 2024F EPS, pegged to -1SD of its long-term forward mean to reflect the challenging environment it is facing.
SHARE PRICE CATALYST
• Better-than-expected ramp-up of the nanofabrication business.
• New application in the advanced material segment such as electric vehicles, bi-polar plate electrodes in fuel cells and solar energy.
