• NanoFilm Technologies's FY20 revenue was above at 111% and core PATMI in line at 96% of our full-year expectations.
• NanoFilm Technologies continues to win wallet share from Customer Z and Microsoft. We expect a ramp-up in capacity in FY21F to meet strong demand from 3C (computer, communications and consumer electronics) market.
• Reiterate ADD with an unchanged target price of S$5.52, still pegged to 35x FY22F earnings per share, supported by high demand for its customers’ products in the 3C market.

Nanofilm's FY20 Results in Line; Growth Driven by 3C Market and New Orders

• NanoFilm Technologies (SGX:MZH) reported a strong set of results, with FY20 revenue at S$218m (+52.8% y-o-y) and core PATMI at S$55m (+54.7% y-o-y), forming 111%/96% of our full-year forecasts.
  • NanoFilm Technologies’s Advanced Material Business Unit (AMBU) business was driven by higher contributions from its 3C and automotive sub-segments to post revenue of S$183m (+66.4% y-o-y) to form 84% of total revenue.
  • The Nanofabrication Business Unit (NFBU) segment recorded revenue of S$11m (+90.3% y-o-y), attributable to new project wins to produce Fresnel lenses for several smartphone models.
  • Industrial Equipment Business Unit (IEBU)’s revenue fell 10% y-o-y to S$25m, which was not a surprise for us as NanoFilm Technologies mainly keeps most of its manufactured equipment in-house to support the AMBU business and remains highly selective on equipment sales.
• Adjusted EBITDA margin expanded 4.4% points to reach 44.4% in FY20, reflecting NanoFilm Technologies’s sole coater status and strong demand for its products and services, in our view.

Expect Capacity Ramp-up in FY21F Underpinned by High 3C Demand

• Key takeaways from our earnings call with NanoFilm Technologies's management are
  • on a year-to-date basis, there has been no slowdown in its 3C Microsoft Corporation, and
  • the rollout of China National 6 emission standards will be a key growth driver for NanoFilm Technologies’s coated automotive piston rings.
• In FY20, Customer Z’s contributions to NanoFilm Technologies’s revenue grew from a year ago (FY19: 51%), according to management. Industry news suggest that Customer Z has plans to Surface products to drive growth in the mid-to high-teens range for 3QFY21, according to its 2Q21 earnings call.
• We believe the robust outlook for NanoFilm Technologies's key customers will continue to drive growth for the 3C segment in FY21F, particularly for the smartphone, wearable and computer sub-segments.

Maintain ADD With An Unchanged Target Price of S$5.52

• We introduce FY23F estimates and reiterate ADD with an unchanged target price of S$5.52 for NanoFilm Technologies, still based on ~35x FY22F earnings per share forecast, as we continue to expect strong growth from the 3C (computer, communications and consumer electronics) markets and wallet share gains.
• We continue to like NanoFilm Technologies for its sole supplier status/proprietary technology moat.
• Catalysts include new order wins from customers/market share gains.
• Downside risks are customer concentration/stronger competition.

Source: CGS-CIMB Research - 1 Mar 2021