Broker's take: UOBKH initiates 'buy' on Nanofilm due to unique tech, superior margin

UOB Kay Hian on Thursday initiated coverage on advanced materials and nanoproducts firm MZH : MZH 0% with a "buy" call and a target price of S$4.07.

The recently listed stock - the first tech unicorn on Singapore's bourse - was trading at S$3.34 as at 2.55pm, up S$0.24 or 7.7 per cent, with some 5.6 million shares changing hands.

Nanofilm, which provides blue-chip customers with surface vacuum coating technology solutions, has a "strong competitive advantage and warrants a premium to its peers", the brokerage wrote.

UOBKH expects to see a robust 38.7 per cent three-year compound annual growth rate (CAGR) for the company's earnings for 2019 to 2022.

This growth will likely come from a bigger wallet share of existing customers as the mainboard-listed firm aims to become a one-stop solution provider, as well as from the new application of technology, said analysts John Cheong and Joohijit Kaur.

Nanofilm is exploring the application of its technology in other industries such as biomedical, Internet of Things and medical implants, they noted.

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In addition, most of its key customers are in industries with "good growth prospects", including smartphones, wearables, computers, automotives and nanofabrication. For example, there is demand for nanotechnology solutions for smartwatch bands, car engine components such as fuel cells, as well as optical lenses and sensory components.

UOBKH said that Nanofilm's differentiated technology-based solutions have enabled its customers to achieve greater user life, enhanced aesthetics and functionality in their end products.

Thanks to its unique coating technology, Nanofilm is the single-source supplier for 90 per cent of its top 10 customers, and has built long-standing relationships with industry leaders in the likes of Fuji, Nikon and Canon, which have been its clients for the past 13-15 years.

Nanofilm has also been supplying to software giant Microsoft as well as smartphone maker Huawei Technologies.

"We believe the company's proprietary technology, heavy emphasis on research and development, and ability to build its own coating machineries have helped to build a high barrier of entry from competitors," UOBKH said.

The company generates a superior net margin of around 25 per cent, more than double the industry average of 12 per cent in 2019, the analysts wrote.

In comparison, 2020 net margins for its US peers - New York-listed 3M Co and PPG Industries - are estimated to come in at about 15.7 per cent and 9.8 per cent respectively. Switzerland's Ems-Chemie, meanwhile, will see a 24.3 per cent net margin, UOBKH said.

Moreover, the global market size for advanced materials is expected to increase at a CAGR of 7.5 per cent between 2020 and 2023, according to research and consultancy firm Frost & Sullivan.

And the global market size for nanoproducts will register a 2020-2023 CAGR of 11 per cent, reaching US$7.8 billion in 2023, based on Frost & Sullivan's forecasts.

Nanofilm made its debut on the Singapore bourse on Oct 30, ending its first day of trading 12.5 per cent or S$0.32 above its initial public offering price.

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