Results Analysis: Outlook remains challenging
- 3Q23 profitable, revenue weaker than expected
- Expect market volatility to continue in 4Q, though efforts to drive margin recovery remain in place
- Expanding geographical footprints, riding on China +1 strategy
- Slashed FY23-25F earnings, maintain FULLY VALUED with lower TP of S$0.83
Revenue slightly below expectations. Nanofilm reported 3Q23 revenue of S$55m, up 37% q-o-q, mainly driven by the seasonal peak period for the computer, communication, and consumer (3C) segment and improvements in inventory rebalancing, but this was still 19% lower on a y-o-y basis. Equipment sales remained weak as the group’s customers continue to be cautious about their capital expenditure on the back of the macro uncertainties.
For the 9M23 period, revenue of S$128m was 29% lower y-o-y. The advanced materials business unit (AMBU) contributed approximately 81% to 9M23 revenue, while the nanofabrication business unit (NFBU) and industrial equipment business unit (IEBU) each contributed approximately 9%. Overall, 3Q23/9M23 revenue accounts for 28%/64% of our forecasts, slightly below expectations.
GP margin improving; 3Q23 profitable. Gross profit margin improved to over 40%, up from 32% in 1H23 and 48.7% in 2H22, mainly due to the ongoing efforts in cost efficiency. Gross profit surged 76% q-o-q due to the improvement in operational performance in 3Q23. However, it was down 28% y-o-y due to the group’s inability to enjoy more economies of scale benefits as a result of lower production volumes in the current challenging environment. 3Q23 operating expenses saw a 10% reduction compared to the previous year but were up 5% q-o-q. No other details on earnings were provided in this business update, except that 3Q23 was profitable at the net earnings level.
Expanding geographical footprints – Europe (Germany), India, and Vietnam; riding on China +1 strategy. Nanofilm plans to enter Europe via Germany, which is the leading market in Europe accounting for about 51% of the thin film coating market. In India, a small operation is expected to commence in 1Q24. The second Vietnam site is also expected to be completed by 1Q24. This puts the group in a good position to ride on the trade diversification trend. To alleviate the start-up costs, the group is redeploying some of the equipment from the Shanghai plants given the lower equipment utilisation there.
Expect market volatility to continue in 4Q, though efforts to drive margin recovery remain in place. 4Q23 could still be volatile given that the inventory destocking trend is still in place, though demand should still be decent as 2H23 is a peak season for the 3C segment. Coupled with the ongoing efforts to improve margins, we expect FY23 to be profitable. The group has put in place various initiatives to drive long-term growth, but any significant contribution can only come in 2025 and beyond.
Progress for the EV battery coating division slower than expected. The group’s joint venture, ApexTech is currently undergoing customer qualification at the component level for electric vehicle busbar connectors, but progress has been slow due to customers having excess production capacity due to the current market weakness. ApexTech is also exploring with potential customers the application of its green plating solutions to other components.
Slashed FY23-25F earnings, maintain FULLY VALUED with lower TP of S$0.83. We have further slashed FY23F-25F earnings by 17% to 55% on the back of the still challenging environment and margin pressure, as the group continues to put in place new initiatives for long-term growth. In the near term, costs would continue to be high. Our revised forecast for FY23F assumes 2H23 to register net profit of S$12.5m, vs net loss of S$7.6m for 1H23. Our target price is reduced to S$0.83 (previous S$0.88), based on 20x PE on FY24F earnings.