CGS International (CGSI) analyst William Tng has reduced his earnings projections for Nanofilm Technologies’ FY2024 results, on expectations that the company will incur higher start-up costs at its new operating sites, leading to a lower target price of 63 cents from 70 cents previously.
Tng believes that the Bloomberg consensus’ FY2024 net profit expectation of $11.4 million is “too high”.
In his Jan 21 note, he revises his FY2024 earnings from $9.2 million to $5.7 million, citing delays in both its startup sites in India and Vietnam.
Additionally, subsidiary Axyntec Dünnschichttechnik GmbH, which Nanofilm fully acquired last February to expand into Europe, is also likely to remain in the red for FY2024.
In addition, Nanofilm’s share of losses from its hydrogen joint-venture Sydrogen Energy amounted to $700,000 in the 1HFY2024, and Tng expects this unit to remain loss-making in the second half of FY2024.
Tng expects Nanofilm’s overall earnings recovery for the current FY2025 and FY2026 to remain sluggish, as its highest margin earning industrial equipment business unit is seeing a slow recovery.
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“While we expect Nanofilm to control its operating costs judiciously, the shift towards a China+1 manufacturing strategy by its customers has resulted in a higher cost base due to the need to build additional capacity in Vietnam and establish a presence in India,” says Tng.
He has reduced the company’s FY2025 to FY2026 revenue forecasts by 3.1% and his gross profit margins cut for FY2025 and FY2026 by 3.5 percentage points (ppts) and 2.2% ppts respectively.
This has led to a corresponding reduction in his FY2025 and FY2026 earnings per share estimates by 30.8% and 20.7% respectively.
Internally, Nanofilm has also undergone leadership changes in FY2024, with its CTO resigning on Mar 13, 2024, and its CEO stepping down on Dec 20, 2024.
Executive chairman and founder Shi Xu has since taken on the role of group CEO as well with effect from Jan 1, which Tng hopes will expedite the group’s net profit recovery.
Given the slower pace of net profit recovery, Tng’s revised TP reflects a valuation of 14.8 times FY2026 price-to-equity ratio (P/E), a one standard deviation (s.d.) discount to the sector’s historical average over FY2021 to FY2025.
Potential upside risks include new order wins, faster-than-expected progress at joint ventures ApexTech and Sydrogen Energy, and a strong demand recovery.
Conversely, de-rating risks include high customer concentration and rising operating costs as the group expands into new markets.
As at 11.45am, shares in Nanofilm are trading 3 cents lower or 3.90% down, at 74 cents.
