Broker's take: Nanofilm's tech will create opportunities in new markets, says UOBKH

UOB Kay Hian (UOBKH) has raised its target price on recently-listed Nanofilm Technologies International by 11 per cent to S$4.52, and maintained its "buy" call.

The nanotechnology solutions provider's stock was trading at an intraday high of S$3.80 as at 3.50pm on Thursday, up S$0.27 or 7.7 per cent, after about four million shares changed hands.

This also came after the company said on Wednesday that it will be included in three FTSE indices later in December, which its chairman Shi Xu said will increase the overall awareness and exposure of the group to index funds and bring about higher trading liquidity.

In a note on Thursday, the UOBKH research team said that Nanofilm's differentiated filtered cathodic vacuum arc technology will help open up opportunities in new markets such as the personal grooming, new energy, 5G, biomedical and aerospace industries, which were previously inaccessible by conventional coating technologies.

The technology gives the user the ability to deposit advanced materials on substrates at room temperature, unlike conventional coating processes where a high temperature is required. This opens up the possibility to use materials that have lower melting points, such as metals, plastic and rubbers that are generally cheaper materials, UOBKH analysts John Cheong and Joohijit Kaur said.

Bigger wallet share and organic growth will also drive Nanofilm's revenue from the computer, communications and consumer electronics market.

This comes as Nanofilm has gained market share in the smartphone segment, as seen from its revenue growth from advanced materials, which has outpaced its largest customer's smartphone sales.

The analysts said: "We expect this trend to continue as we understand the group's market share (percentage of total addressable market for surface solution for smartphones) is still relatively small."

Moreover, the recent launches of 5G-enabled smartphones could spark a meaningful update cycle, a "premiumisation" trend and a change in design language which could lead to a growing involvement for surface solution providers like Nanofilm, they added.

Nanofilm's second plant in Shanghai - expected to be fully operational by end-2021 - will also support the company's growth in the medium term, according to UOBKH. The plant will be able to house 200 more pieces of coating equipment, bringing the total number of equipment to up to 322 units, from 122 as at June 2020. This additional production capacity will support the group's push to gain market share for the next few years, UOBKH added.

The research team last month initiated coverage on the stock, which made its trading debut on the Singapore Exchange's mainboard in October. UOBKH said then that it expects to see a robust 38.7 per cent three-year compound annual growth rate for the company's earnings for 2019-2022.