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CGS-CIMB optimistic on Nanofilm, but lowers revenue expectations as customers face supply chain woes

·3-min read

CGS-CIMB has revised its target price for Nanofilm downward, citing supply chain woes for its customers and higher R&D costs.

CGS-CIMB Research analyst William Tng has maintained his “add” call on Nanofilm, but has lowered his target price for the stock from $4.02 to $3.92.

“Our FY2020-2023 earnings per share (EPS) compound annual growth rate (CAGR) is 22.25% and a target price-to-earnings ratio (P/E) of 22.25 times will translate into a P/E-to-growth ratio of 1.0 times,” writes Tng in a Jan 18 report.

“We ascribe a 15% premium to this multiple (for its potential growth prospects and proprietary technology) and value the company at 25.59 times FY2023 EPS, leading to a lower target price of $3.92 (previously $4.02 using 30.44 times FY2022 EPS),” he adds.

In the same report, Tng forecast that Nanofilm’s 4Q results for FY2021 (ending Dec 30, 2021) is “likely better” as production picked up during the period.

However, he thinks previous revenue expectations for FY2021-2023 may need to be lowered for now, pending stronger growth recovery for its customers.

Furthermore, he also sees that Nanofilm will continue to see higher operating expenses as it spends to prepare the company for future growth.

Elaborating, he says that operating expenses were generally higher in FY2021, as Nanofilm added headcount, new equipment and faced qualification costs to meet customers’ requirements.

“Typically, the third quarter is the busiest quarter; however in FY2021, the company’s fourth quarter was the busiest due to supply chain disruptions.”

As such, Nanofilm expects some of the production scheduled for 4QFY2021 to spill into 1QFY2022.

He noted that mass production for its first micro‐lens array (MLA) project for its customer’s new‐generation wearables has commenced, and the company expects positive contribution from the Nanofabrication Business Unit (NFBU) in 4QFY2021F and beyond, as there are other new projects under development.

Nanofilm also updated that it will be accelerating its efforts to develop core technologies and new product offerings. Over the last three financial years, Nanofilm has incurred approximately 5.9% of revenue per year in R&D and engineering expenses.

The group’s target spend on research and development (R&D) is more than 5.0% of revenue, and in the update, Nanofilm has also highlighted that it is involved in the development of engineered optics for virtual reality and augmented reality glasses.

With these expenditures and supply chain disruptions to customers, Tng thinks his previous revenue expectations may take longer to be realised.

Hence, Tng has reduced his FY2021-2023 revenue forecasts by 3.3-5.6%. In line with the company’s long-term growth plans, he has also raised his operating expenses assumptions for FY2021-2023.

Some rerating catalysts for Nanofilm also include new order wins from customers and market share gains, while downside risks are customer concentration or persistent component shortages, and an inability to find uses in new verticals for its coating solutions.

As at 11.44am, shares of Nanofilm are trading at $3.13, with an FY2021 price to book ratio of 4.79 and dividend yield of 0.55%.

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