• We expect NanoFilm Technologies (SGX:MZH) to deliver earnings of S$47m for 2H21 (vs S$18m in 1H21) with the easing of supply chain issues and seasonally stronger demand. However, we remain cautious as:
  1. we expect NanoFilm Technologies to incur higher costs to enhance its future growth, and
  2. NanoFilm Technologies’s P/E multiple is much higher vs its peers’, which could cap its upside in a rising interest rate environment.
• We trim our 2022F earnings per share forecast for NanoFilm Technologies by 13%.

Expect Nanofilm's Upcoming 2H21 Earnings of S$47m, Much Higher Than 1H21’s S$18m

• We expect NanoFilm Technologies to deliver earnings of S$47m for 2H21 (vs S$18m in 1H21), with the easing of supply chain issues and seasonally stronger demand in the second half of the year.
• In its Dec 21 update statement, NanoFilm Technologies highlighted that its advanced material business unit (AMBU), the largest segment which contributed around 82% of 9M21 revenue, has seen a rebound in production output for its Consumer Electronics, Communication and Computers (3C) sub-segment following the commencement of its peak period in 4Q21. This momentum is expected to be carried into the 1Q22.
• Beyond 3C, the other segments including automotive, precision engineering and printing & imaging continue to deliver strong growth, driven by the increasing adoption of Nanofilm’s greener and functional advanced materials solutions.

Remain Cautious Due to Higher Costs and Higher Valuation Multiples Vs Its Peers

• Despite the expectation of a 23% correction of NanoFilm's share price year-to-date, its 2022F P/E multiple of 24x is a significant premium to its peers in Singapore at 12x – this could cap the stock’s upside in a rising interest rate environment.

Potential Continued Disposal of Shares by Substantial Shareholder Could be An Overhang for Nanofilm's Share Price

• We note that a global fund management group, which was a substantial shareholder of NanoFilm Technologies, has pared down its stake to be reported.

Revenue Diversification

• With NanoFilm Technologies’s continuous efforts to enter new industries, it has improved diversification of its customer base. Aside from its largest key customer, revenue contribution from other customers has increased from 33% to 39% year-to-date.
• Development efforts in new exciting areas are intensifying with pathways to commercialisation. These areas cover multiple transformational fields in:
  1. new classes of advanced materials through greener and sustainable composites,
  2. engineered optics for virtual reality and augmented reality to revolutionise the manner in which a person interacts with the world, and
  3. hydrogen fuel cell technologies and components to enable decarbonisation energy transition through hydrogen.

Nanofilm - Earnings Revision & Recommendation

• We maintain our 2021 earnings forecast for NanoFilm Technologies but reduce our 2022/23 earnings forecast by 13/18% as we reduce discount of 10% vs NanoFilm Technologies’s peers. We believe this is justifiable given the higher 3-year CAGR growth profile of its peers.

• Catalysts:
  • Better-than-expected ramp up of nanofabrication business.
  • New application in the advanced material segment such as automobile (bi-polar plate electrodes in fuel cells) and FMCG.

Source: UOB Kay Hian Research - 24 Jan 2022