According to Lim, Nanofilm's performance is "highly correlated" to demand for its customers’ products, which has been "challenging" amidst a digital downturn, sticky inflation, and supply chain disruptions.
Even so, Nanofilm has invested "steadily" to diversify its operating base beyond China, specifically, Vietnam. It has also set up a new business unit, Sydrogen, to focus on developing solutions for a hydrogen economy.
"We believe that these initiatives – alongside its proprietary, differentiated coating solutions that drive customer stickiness, as well as the large total market potential – position the company well for long-term growth, supported by favourable secular trends," says Lim.
While the company's 3QFY2024 results suggested that the worst is over, Lim prefers to see further sequential, sustainable improvement to build up confidence around the name.
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However, Lim points out that Nanofilm's share price is down 9.3% since her last update on Feb 26, following the release of the FY2024 earnings.
Revenue grew by 15.4%, which exceeded Lim's expectations, but earnings by 10.3% on lower margins than assumed.
The company's management sounded "cautiously optimistic" about the current FY2025, she adds..
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Lim, citing data points such as the University of Michigan's Consumer Sentiment Index, warns of increasing downside risk of softening end-demand for consumer electronics no thanks to concerns over higher inflation ahead of US President Donald Trump’s tariff announcement on “liberation day”.
"A slowdown in US growth is likely to have spillover effects on the global economy," says Lim.
She notes that Nanofilm's key customer, Apple, has delayed its much-anticipated Siri upgrade from spring to “the coming year”.
"We view this as a negative for Nanofilm as the new artificial intelligence (AI) features were expected to drive a refresh cycle later this year," says Lim.
She is pushing back her recovery expectations and bake in lower growth forecasts, leading to the lower fair value target.
Nanofilm shares closed at 63 cents on April 2, down 0.79% for the day.
