Nanofilm Technologies: Outlook improving; cost pressures remain
- 1H24 results in line, led by recovery in 3C; operating expenses still high
- Anticipate a stronger 2H; outlook for 3C improving but margins yet to reach optimal levels
- Earnings cut by 18-42% on lower net margin assumption as operating expenses remain high
- Maintain HOLD with a higher TP of SGD0.75 as we roll forward to FY25F earnings
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The Nanofabrication Business Unit (NFBU) grew 49.8% y/y, attributable to higher sales in the consumer electronics sectors.
The Industrial Equipment Business Unit (IEBU), however, saw a 56.0% y/y revenue decline due to a softer market as customers were cautious with capital expenditure and the equipment sales cycle is typically longer. Contribution from Sydrogen is still small at SGD0.7mn. 1H24 revenue accounts for 43% of our forecasts, in line. An interim DPS of 0.33scts was declared.
Improvement in gross margin sustainable; 1H24 net loss narrowed vs. a year ago. Gross profit saw an 18% y/y improvement to SGD27.7mn. Gross profit margin (GPM) improved to 33.5% in 1H24 compared to 32.0% in 1H23, and 33% in 1Q24, primarily due to the recovery in AMBU and NFBU, but partially offset by a weaker performance in IEBU. We expect further GPM improvement in 2H24 as production volume increases. In 2H23, the group registered a GPM of 40.6%. Net loss reduced to SGD3.7mn for 1H24 compared to a net loss of SGD7.9mn for 1H23. This was mainly due to higher sales and cost control measures in place.
Anticipating a stronger 2H. 2H is typically a much stronger period for Nanofilm due to its significant exposure to the 3C segment. This segment generally sees higher sales, driven by new product launches from key customers and the festive season. The group expects increased contributions from both existing and new 3C customers. Additionally, Nanofilm plans to ramp up production of projects that were delayed in 1H24. This could comprise 5-10% of total revenue.
Outlook for 3C improving. Early signs of a recovery, though uneven, are evident in the PC and smartphone markets. The PC market registered its third consecutive quarter of y/y growth in 2Q24. This segment is projected to deliver shipment growth of 1.9% y/y in 2024, following a 14.7% decline in 2023. Similarly, for the mobile segment, shipment is expected to rebound with a 2.2% y/y growth, followed by 4.6% in 2025. Furthermore, demand for AI-enabled devices is expected to drive further growth.
Margins expected to be below historical average as new initiatives are still in the development stage. Significant contributions from the group’s other initiatives, including the energy business (hydrogen fuel cell, advanced EV battery, and solar cell), are only expected 2025 and beyond. Hence, margins are still expected to be less than optimal. We expect GP margin to improve to c.40% in FY24F from the 37% in FY23 but remain below the FY18-FY22 historical average of c.52%.
Earnings cut by 18-42% as operating expenses still high. We raised revenue forecasts by about 10% each for FY24F and FY25F. FY24F should benefit from new products introduction (NPI) delayed from 1H24. For FY25F, we can expect increasing contribution from smartphone projects with a leading Asian consumer brand company and local leading Chinese companies. There is no change in our gross margin assumption of 40%/43% for FY24F/FY25F. However, net margin is cut to 6.3%/10.7% from 12-14% previously, primarily attributed to elevated operating expenses and slower revenue recognition, with some projects still at the NPI stage. Hence, net profit is slashed by 42%/18% for FY24F/FY25F.
Maintain HOLD with a higher TP of SGD0.75. TP, however, is raised to SGD0.75 (from SGD0.63) as we roll forward to FY25F earnings, still pegged to a 18x PE, slightly below the -1SD from its four-year average PE. Maintain HOLD, as near-term cost pressure remains.
FY Dec | 1H2023 | 2H2023 | 1H2024 | % chg y/y | % chg h/h |
Revenue | 73 | 104 | 83 | 13.0 | (20.4) |
Cost of Goods Sold | (50) | (62) | (55) | 10.6 | (10.9) |
Gross Profit | 23 | 42 | 28 | 18.0 | (34.3) |
Other Oper. (Exp)/Inc | (31) | (31) | (31) | (2.3) | (1.2) |
Operating Profit | (8) | 11 | (3) | (61.7) | - |
Other Non Opg (Exp)/Inc | 0 | 0 | 0 | - | - |
Associates & JV Inc | 0 | 0 | 0 | - | - |
Net Interest (Exp)/Inc | 0 | 0 | 0 | - | - |
Exceptional Gain/(Loss) | 0 | 0 | 0 | - | - |
Pre-tax Profit | (8) | 11 | (3) | 58.1 | - |
Tax | 0 | 0 | 0 | - | - |
Minority Interest | 0 | 0 | 0 | - | - |
Net Profit | (8) | 11 | (4) | 51.1 | - |
Net profit bef Except. | (8) | 11 | (4) | 51.1 | - |
EBITDA | 9 | 28 | 16 | 77.0 | (44.4) |
Margins (%) |
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|
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Gross Margins | 32.0 | 40.6 | 33.5 |
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Opg Profit Margins | (10.9) | 10.6 | (3.7) |
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Net Profit Margins | (10.5) | 10.4 | (4.5) |
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