• NanoFilm Technologies's 1H21 PATMI below expectations, dragged by supply chain risks, unfavourable sales mix and one-off expenses for 2H21F ramp-up.
• COO departure has minimal impact. Demand still strong with new projects in the pipeline; much will depend on customers’ ability to secure components.
• Reiterate ADD rating for NanoFilm Technologies, with a lower target price of S$5.05, pegged to ~34x FY22F P/E.

NanoFilm Technologies's 1H21 PATMI Dragged by Change in Sales Mix and One-offs

• NanoFilm Technologies (SGX:MZH) delivered 1H21 revenue of S$96.6m (+24.2% y-o-y) and PATMI of S$17.9m (-3.1% y-o-y), forming 35% (in line) and 21% (below) of our FY21F forecasts, respectively. Gross profit margin was down 6% points y-o-y to 46.1%, due to:
  1. supply chain disruptions,
  2. nanofabrication revenue down 47.8% y-o-y to S$1.7m in 1H21 due to end-of-life projects and no new projects secured,
  3. change in revenue mix towards decorative coating (lower gross margins) in the 3C sub-segments, and
  4. one-off expenses of S$5.4m for its Shanghai Plant 2 and new product introduction (NPI) costs as NanoFilm Technologies prepares for a ramp-up in 2H21F.

Strong Demand, But Supply Chain Risks Persist

• We note that NanoFilm Technologies's 1H21 PATMI was lower than expected production ramp-up in anticipation of strong demand from Customer Z’s new product launch in 2H21F, but execution is key, in our view.

COO’s Departure Has Minimal Impact; New Projects in the Pipeline

• NanoFilm announced the departure of its chief operating officer (COO) on 13 further departures of its key executives.
• In 1H21, NanoFilm Technologies also announced it is close to securing two new projects for its nanofabrication BU, namely:
  1. micro lens array for a new smart watch series, of which it is one of two suppliers to its customer, and
  2. optical sensors, of which it is a single source supplier.

Reiterate ADD on Nanofilm With a Lower Target Price of S$5.05

• We cut our FY21F-23F core earnings per share forecast for NanoFilm Technologies by 2.4%-17.8% as we pencil in lower gross margin expectations.
• Reiterate ADD rating for NanoFilm Technologies, but our target price falls to S$5.05, pegged to ~34x FY22F P/E, 1 standard deviation below its historical mean (previously 35x) to account for supply chain risks.

• Re-rating catalysts include new order wins from customers/market share gains.
• Downside risks are customer concentration/component shortages.

Source: CGS-CIMB Research - 16 Aug 2021