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Citi remains cautious on Nanofilm amid uncertain demand recovery

For 2HFY2023, Citi forecasts a 29% y-o-y decline in Nanofilm’s revenue.

Citi Research analyst Jame Osman has maintained “sell” on Nanofilm MZH with a target price of 85 cents on the back of uncertain demand recovery as well as margin pressure from the company’s capacity expansion plans.

In his Sept 25 report, Osman notes that Nanofilm’s share price has declined about 30% YTD, following its weaker than expected 1HFY2023 performance.

For 2HFY2023, Citi forecasts a 29% y-o-y decline in Nanofilm’s revenue. While this still implies a h-o-h recovery, the analyst believes the overall demand levels would remain subdued.

This is due to lower smartphones and wearables shipment volume of its key Customer Z as well as lower customer capital expenditure (capex) spend, which is impacting its industrial equipment business unit sales.

The supply chain relocation strategies of its key customer is also likely to constrain a more favourable recovery pace until Nanofilm’s reallocated new capacity comes onstream, Osman says. Additionally, meaningful contribution from new customers such as ApexTech is only likely from 2HFY2024.

“Nevertheless, we expect a return to profitability in 2HFY2023 due to higher contribution of consumer electronics, communication and computer (3C) customer mix,” says Osman.

To align itself with its key Customer Z’s supply chain relocation, Citi expects Nanofilm to prioritise and accelerate the expansion of its Vietnam facility by 1Q2024 while it seeks factory space in India. The company is also repurposing and reallocating the coating equipment from its Shanghai plant to optimise utilisation.

Concurrently, Nanofilm is looking for potential sites or mergers and acquisition opportunities in Europe, which Citi believes will target new customer expansion in the non-3C industrial space. This is due to the recent onboarding of its chief commercial officer Ian Howe, who was previously with materials and surface solutions provider Oerlikon.

Osman’s target price of 85 cents implies a FY2024 PE of 27x versus an EPS CAGR of -2.4% over FY2022-FY2025.

“Within our Singapore tech coverage universe, we prefer companies such as Venture Corp with a relatively more diversified customer base, and in our view better positioned to benefit from the structural supply chain diversification efforts of global customers,” says Osman.

As at 11.08am, shares in Nanofilm are trading 2.5 cents lower or 2.63% down at 92.5 cents.

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