Brokers' take: Analysts lower Nanofilm target price on weak results, leadership uncertainty

ANALYSTS from UOB Kay Hian, DBS and Jefferies on Tuesday downgraded Nanofilm Technologies MZH : MZH 0%to "hold", a day after the company's shares lost almost a third of its value.

UOBKH's John Cheong lowered the target price of the nanotechnology solutions company to S$4.00 from S$5.51, DBS's Ling Lee Keng lowered it to S$4.18 from S$6.22, while Jefferies' Krishna Guha lowered its target price to S$4.25 from S$6.50.

CGS-CIMB analysts William Tng and Darren Ong also lowered their target price to S$5.05, down from their previous target of S$5.52, although they maintained "add" on the company.

Mr Guha noted while it was "commendable" that the group saw topline growth despite the global chip shortage, leading players in the field like Apple continued to see 30 per cent plus topline growth in the same period.

"This, along with the fact that the group added the historically smallest number of equipment in H1, makes us worry about execution issues and adverse changes in key client relationship/competitive pressures," he said.

Both Mr Cheong and Ms Ling also attributed their downgrades to the company's disappointing results, with Mr Cheong noting that the company only met 22 per cent of his full-year estimate. In contrast, 30 per cent of the company's earnings were made in the first half of FY2020.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

Both analysts noted the higher-than-expected costs associated with the company's Shanghai Plant 2, with Ms Ling pointing out that Shanghai Plant 2 saw increased expenses of S$2.6 million as the company spent on utilities, facility management, manpower additions, training costs and equipment qualification costs to enable production.

She further noted that the company made lower average margins for the first half of its fiscal year as the company's major customer directed it to allocate more resources to the production of smartphones over tablets and wearables, which have higher margins.

Still, according to CGS-CIMB analysts' checks, the major customer continues to expect strong demand for its products, but acknowledges tight supply constraints for its smartphones and tablets. As Nanofilm prepares to ramp up production, the analysts believe that execution will be key.

Mr Cheong further cited new production introduction costs as another reason for cutting the company's gross margin estimate by two percentage points to 52 per cent.

Ms Ling also sounded a note of caution regarding the company's leadership uncertainty. Chief executive officer Lee Liang Huang stepped down due to health reasons in June, while chief operating officer Ricky Tan resigned on Monday. The company has also said that it would remove the position as part of its overall restructuring plan to enable various units to have full accountability and responsibility.

"We prefer to wait for more clarity on the leadership front before we turn buyer again," she said, noting that the departures have dented investor confidence.

However, the CGS-CIMB analysts believe that the departure of Mr Tan will have a minimal impact on the company, since the three business units are now individually led by their respective heads. Furthermore, they believe that the company is close to securing two new nanofabrication projects. These are a micro lens array for a new smartwatch series, of which it is one of two suppliers to its customer, and optical sensors, of which it is a single-source supplier.

Similarly, UOBKH's Mr Cheong assigned a slight premium to Nanofilm over its peers in its target price, even as he adopted a more conservative price-to-earnings growth multiple due to its earnings disappointment.

"We believe its unique technology, superior net margin and sole supplier status for most of its major customers provide a strong competitive advantage and warrant a premium to peers," he said.

Referencing Monday's share price movements, Jefferies' Mr Guha said that investors may have factored in impending estimate cuts due to the company's slower growth outlook.

"However, we don't think de-rating has started and is not warranted either, in our view, as long as the group is able to preserve margins and grow," he said.

Nanofilm shares closed at S$3.82 on Tuesday, down S$0.43 or 10.1 per cent. 

READ MORE: 

• Nanofilm shares fall 28.8% on disappointing H1 results despite firm's upbeat outlook

• Nanofilm H1 profit dips 3.1% to S$17.9m; COO quits