9M23: Revenue In Line But Expect Weakness To Continue In 4Q23; Downgrade To SELL
Nanofilm reported 3Q23 revenue of S$55m (-19% yoy, vs S$73m in 1H23). 9M23 revenue is in line with our expectation, forming 80% of our full-year estimate. The operating environment for 3Q23 remains challenging due to weaker consumer sentiment, with expected market volatility in 4Q23. 2024’s outlook is also uncertain. We trim our 2023 and 2024 earnings by 98% and 34% respectively. Reduce target price by 34% to S$0.66. Downgrade to SELL on a more challenging mid-term outlook.
• 9M23 revenue in line, profitability achieved in 3Q23 due to better gross margin and cost management. Nanofilm Technologies International (Nanofilm) reported 9M23 revenue of S$128m (-28% yoy), in line with our expectation and accounting for 80% of our full-year estimate. 3Q23 revenue was S$55m (-19% yoy, vs S$73m in 1H23), which means that Nanofilm has achieved profitability vs an S$8m loss in 1H23. Gross margin improved to above 40% in 3Q23 vs 32% in 1H23 due to ongoing efforts in cost management. This improvement occurred despite a 19% yoy decline in revenue. Also, operating expenses dropped by 10% yoy in 3Q23.
• The operating environment for 3Q23 continued to be challenging. This was due to macro headwinds and dampening of overall consumer sentiment. Nanofilm saw an uptick in operational activity for 3Q23, which was driven by the seasonal peak period for the Computer, Communication and Consumer (3C) segment, but this was lower yoy.
• Target for profitability in 2023 will be dependent on end-consumer demand for new 3C product launches; 2024 outlook continues to be uncertain. As a result, bottom line may be negatively impacted if end-consumer demand remains muted. Nanofilm’s 3C consumer business under its advanced materials business unit (AMBU) and nanofabrication business unit (NFBU) is seeing improvement in inventory rebalancing but production volumes are still lower yoy. For industrial equipment business unit (IEBU), customers remain tight on their capex but there are active engagements with customers for their requirements in the coming year. For 2024, the macro environment continues to be uncertain. Nevertheless, Nanofilm will double down on efforts to balance cost management with the necessary spending to support future growth whilst remaining focused on delivering long-term growth.
• Nanofilm will be building up its functional coating capabilities and presence in Europe and this will be supplemented by selective inorganic growth opportunities. In India, Nanofilm is finalising a factory-in-factory arrangement with a partner to expedite its deployment of equipment for the 3C supply chain, and this is expected to be completed by 1Q24. As for Vietnam, with Phase One renovations and fit-out for the group’s second Vietnam site expected to be completed by 1Q24, the installation and commissioning of AMBU Consumer and NFBU equipment will commence first, with IEBU operations to follow thereafter.
• Nanofilm’s JV, ApexTech, is currently undergoing customer qualification at the component level for electric vehicle busbar connectors. However, progress has been slow due to customers having excess production capacity caused by the current market weakness. ApexTech is also exploring with potential customers the application of its green plating solutions to other components.
• We have reduced our earnings forecasts for 2023/24/25 by 98%/34%/44% after reducing our revenue forecasts by 0%/5%/22% 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 new profit guidance of Nanofilm which expects an uncertain outlook for 2024. In addition, we have also reduced our 2023/24/25 gross margin estimates by 3.0%/6.5%/7.0% to 33.0%/38.0%/40.0% to incorporate the lower operating leverage from reduced revenue and higher operating costs.
• Downgrade to SELL with a 34% lower target price of S$0.66. We value Nanofilm based on 17.5x 2024F EPS, pegged to -1SD to its long-term forward mean to reflect the challenging environment it is facing.
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• Better-than-expected ramp-up of the nanofabrication business.
• New application in the advanced material segment such as EVs, bi-polar plate electrodes in fuel cells and solar energy.