Nonetheless, Lim notes that the company has continued to invest steadily in capacity expansion, diversifying its footprint beyond China, as well as setting up a new business unit, Sydrogen, to focus on developing solutions for a hydrogen economy.
She notes in her Aug 5 report: “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.”
“We have witnessed an inflection in Nanofilm’s financial performance in 3QFY2024, which seems to suggest that the worst is behind the company. Nonetheless, we would prefer to see further sequential, sustainable improvement to build up confidence around the name,” adds Lim.
On July 23, Nanofilm’s share price experienced a sharp one-day rally of 12.4%. To this end, Lim suspects that this could have been driven by “pre-emptive positioning” by investors following the update that an initial tranche of $1.1 billion has been placed with three asset managers under the EQDP.
Lim writes: “The MAS will appoint more asset managers in the second tranche by 4QFY2025. Additionally, MAS will also provide $50 million under the Grant for Equity Markets (GEMS) scheme to strengthen equity research and listing support. We expect this to benefit quality small/mid-cap stocks and potentially improve their liquidity.”
With this, she sees that investor sentiment and interest around small and mid-cap names such as Nanofilm could be sustained.
On tariffs, she notes that the markets where Nanofilm have an operating footprint generally “enjoy” lower tariff rates than what had been announced on Liberation Day.
See also: Aletheia Capital starts Info-Tech at ‘buy’, expecting $18 mil ebitda in FY2025
Lim writes: “Vietnam now sees tariff rates at 20%, India at 25%, and the European Union (EU) at 15%, while discussions with China remain underway. Nanofilm’s diversified footprint allows it to support key customers across multiple geographies.”
She adds that while market and opinion research company, Ipsos, has kept its Global Consumer Confidence Index “steady” in July, she remains cautious as any indirect impact on Nanofilm remains challenging to quantify.
With this, the OIR analyst is staying put on her forecasts ahead of Nanofilm’s 1HFY2025 results, which are expected to be released after the market closes on Aug 13.
“However, we raise our target FY2026 price-to-earnings (P/E) multiple from 17.9 times to 20.6 times. This is in-line with the average next financial year P/E ratio since the company’s listing in Oct 2020,” adds Lim.
Her “hold” call on the other hand, is unchanged given Nanofilm’s limited upside potential at current price levels and a still cloudy outlook.
Potential catalysts noted by Lim include a strong improvement in business sentiment encouraging customers to resume capital expenditure (capex) spending, easing supply chain disruptions, positive revenue and cash flow contribution from Sydrogen and an earlier-than-expected roll out of new products.
Conversely, investment risks include persistently weak demand from end-industries, failing to defend proprietary intellectual property rights, prospective growth dependent on the success of research and development (R&D) and finally, the possible emergence of competing suppliers.
Shares in Nanofilm closed 0.5 cents lower or 0.69% down at 72.5 cents on Aug 6.
