Is Nanofilm the growth stock we need to revive investor enthusiasm for equities?

IS IT just me, or did Nanofilm Technologies suffer a rather lukewarm debut on Friday? The homegrown, technology-oriented company saw a strong overall subscription rate of 23.3 times for the more than 77.2 million shares it offered investors at S$2.59 each. Yet its shares ended their first trading day at S$2.91, only 12.4 per cent above the offering price.

Some market watchers might argue that a low-double digit percentage gain on the first day of trading is perfectly respectable, especially as the offering was priced at a seemingly stiff 46 times 2019 earnings.

Moreover, Nanofilm hit the market at a time of heightened volatility around the world, spurred by concerns about Covid-19 infection rates and general uncertainty ahead of the US presidential election.

Yet, there are no recent initial public offerings (IPOs) to which Nanofilm can be easily compared. And if investors who were eager to gain exposure to Nanofilm during its IPO are now holding back from buying in the market because of volatility, at what level are they hoping to get in?

While Nanofilm has a lot to prove as a newly listed company, it would be disappointing if its market price were to slide any closer to its IPO price this week.

The company generates most of its revenue from providing coating technologies and advanced materials that enable its customers to achieve functional and aesthetic improvements in their end-products. These products include everything from mobile phones and computers to car engine components and multifunctional printers.

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Much of the value of the company, however, lies in the revenue and earnings that it might generate in the future as its technologies are adapted and applied in exciting new fields, including optical sensors, fuel cells and solid state batteries, and medical implants.

In short, Nanofilm might turn out to be the most interesting stock to hit the local market in years.

Too yield-focused?

One explanation often trotted out for the dearth of companies like Nanofilm in the local market is that Singapore investors prefer stocks that deliver income rather than growth.

Certainly, the largest locally listed companies in Singapore tend to be good dividend payers. Also, real estate investment trusts (Reits), which are structured to deliver the bulk of their return through cash distributions, have been a big success.

Today, six of the 30 components of the benchmark Straits Times Index (STI) are Reits.

Singapore investors' preference for yield-oriented stocks might have something to do with the fact that they often deliver the best total risk-adjusted returns.

For instance, since the beginning of this year, only eight of the 30 components of the STI have delivered a positive return. Of those eight counters, four are Reits.

Keppel DC Reit, which became a component of the STI only last month, was the best performer with a total return of 42.8 per cent.

Even over longer time frames, and time frames that do not include the Covid-19 crisis period, Reits have delivered relatively good returns.

The question that should perhaps be asked is not why the Reits have done so well but why the non-Reits have not done better.

In particular, it is surprising how poorly the leading property developers have done over the past decade. CapitaLand chalked up a total return of just 16.2 per cent from end-2009 to end-2019, a period that excludes the worst of the global financial crisis as well as the Covid-19 pandemic.

By comparison, CapitaLand Mall Trust (CMT) and CapitaLand Commercial Trust (CCT) generated total returns of 128.3 per cent and 202.4 per cent, respectively, over the same period.

CapitaLand's failure to generate higher returns than its flagship Reits is puzzling, and may be a sign that it is not making sufficiently good use of its capital. After all, its strategy is to shunt stabilised commercial properties to its Reits in order to recycle its capital into projects with higher returns.

Tough backdrop

So, why are locally listed stocks not performing better?

One narrative I have heard is that the past decade has presented Singapore's largest companies with a very tough operating backdrop.

In particular, the commodities sector cooled dramatically. Oil prices have fallen from highs of more than US$100 per barrel in 2014, to less than US$40 per barrel now.

China's growth dynamics also began shifting in 2015. The country began leaning towards domestic consumption spending and slowing its investment spending, which is said to have had an adverse impact on global demand.

In addition, traditional industries in Singapore - from transport, to retailing, to media - have all faced technological disruption.

Meanwhile, the local property developers have been hammered by tough cooling measures, which included punitive stamp duties and caps on mortgage lending.

The combination of these factors has weighed on the performance of Singapore's corporate sector. Coupled with the lack of exciting new listings, this has led to a decline in the vibrancy of the local market and reduced investor interest.

Reposition, unlock value

These explanations, even if they are true, should not be allowed to be turned into an excuse for poor performance.

Shareholders should prod the boards and senior managers of their companies to pursue restructurings that unlock value, and to adapt their businesses to benefit from new growth trends.

To some extent, this is already happening. Sembcorp Industries recently recapitalised its subsidiary Sembcorp Marine through a deeply discounted rights issue, and then unloaded its stake in the company through a distribution in-specie.

Separately, Keppel pledged to monetise some S$17.5 billion of assets over the next few years and channel the proceeds into new growth initiatives. It also plans a strategic review of its beleaguered offshore and marine business.

Wilmar recently spun off its Chinese subsidiary Yihai Kerry Arawana as a separately listed company, which has left its own shares looking undervalued.

On the other hand, CapitaLand evidently sees size and scale as the answer. Last year, it acquired Ascendas-Singbridge from Temasek Holdings for S$6 billion, half of which was paid for with new shares priced at a steep discount to net asset value.

Last month, CCT was dropped as a component stock of the STI as it was absorbed by CMT in a controversial merger. CapitaLand figures the enlarged Reit will be better positioned to raise funds and make acquisitions.

Some of these moves will be more effective than others in creating value. In any case, many more companies will need to take action before investors get really excited about equities once more.

In the meantime, it would not be a bad thing if a hot growth stock or two were to list and liven up the market. We will soon find out if Nanofilm has what it takes to do that.