Brokers' take: CGS-CIMB lowers target for Nanofilm Technologies on potential delayed revenue gains

CGS-CIMB lowered its target price for Nanofilm Technologies MZH to S$3.92 from S$4.02, citing potential higher operating expenses and revenue expectations that may take "longer to be realised" as the company focuses on its long-term growth plans.

In a report on Wednesday (Jan 19), analyst William Tng reduced his projections of the company's earnings per share for FY2021 by 8.5 per cent, FY2022 by 5.4 per cent and FY2023 by 5 per cent.

The target price is 25.59 times the brokerage's estimates for FY2023 earnings, which takes into account potential growth prospects and proprietary technology.

Shares of Nanofilm closed on Wednesday at S$3.06, down by S$0.24 or 7.3 per cent.

CGS-CIMB maintained the "add" call on Nanofilm in acknowledgement of its long-term growth plans to accelerate the development of its core technologies and new product offerings.

Tng observed that over the last 3 financial years, Nanofilm has incurred about 5.9 per cent of revenue per year in research & development (R&D) and engineering expenses, with the group's target spending on R&D more than 5 per cent of revenue. The company has also highlighted that it is involved in the development of engineered optics for virtual reality and augmented reality glasses.

In addition, Nanofilm expects positive contributions from its first micro-lens array project for new generation wearables - which has since commenced mass production - in Q4 2021 and beyond, alongside other new projects in development.

As a result, Tng has reduced his revenue forecasts for the company's FY2021-2023 by 3.3 to 5.6 per cent, and raised his operating expenses assumptions for the same period.

Tng noted that Nanofilm's estimated operating expenses for FY2021 were generally higher as the tech manufacturer added "new headcount, new equipment and faced qualification costs" to meet customers' requirements.

He expects some of the company's production scheduled for Q4 of FY2021 - which ended up the busiest quarter due to previous supply chain disruptions in Q3 - to spill into Q1 of FY2022.

"Rerating catalysts include new order wins from customers/market share gains. Downside risks are customer concentration/persistent component shortages, and an inability to find uses in new verticals for its coating solutions," Tng added.

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