Following the release of its first-quarter results, Singapore-based company Nanofilm Technologies has seen a sharp drop in its share price, which plummeted by 9%.
For those unfamiliar with the company, Nanofilm specializes in developing, manufacturing, and marketing advanced materials and nanotechnology products, including high-performance coatings, optical films, and other nanostructured materials that improve the performance and durability of various surfaces and devices. These products are used in a range of industries, such as computer, communications and consumer electronics, automotive, precision engineering, printing and imaging, and new energy.
Interestingly, just three years ago, the stock was well received during its IPO, with shares being oversubscribed and opening at S$2.77. However, the stock has since taken a significant hit, trading at close to half its initial value at S$1.51.
What happened to Nanofilm and why are investors losing confidence in the company?
To answer these questions, we examine the latest financial data and take a closer look at the company’s overall performance. By analyzing key metrics, we can better understand what’s causing the decline in the stock price and why investors are becoming more uncertain about the company’s future prospects.
Nanofilm Fall Short of Expectations: Q1 Results
Nanofilm Technologies’ recent stock price plunge can be attributed to the company’s dismal first-quarter performance.
The company announced its 1Q2023 earnings, which came in at S$33 million, marking a 40% year-on-year decrease compared to 1Q2022. This significant decline was unexpected, especially when compared to Bloomberg consensus full-year estimates of 12%.
The mismatch between expectation and reality could thus be the reason the stock price corrected downwards.
Further analysis revealed that Nanofilm Technologies has four business units, with the Advanced Materials Business Unit (AMBU) accounting for around 75% of the company’s year-to-date revenue. Being the largest segment, AMBU’s poor performance has resulted in a considerable decline in the company’s overall revenue.
Shareholders don’t buy Nanofilm’s explanation
Management has explained that this decline is due to the cyclicality of their business and the 3C (Consumer, Computer, and Communication) production cycle, which typically results in reduced revenue during the first quarter.
Nonetheless, given that this year’s Q1 performance was noticeably weaker than the same quarter last year, the reason provided may not be as persuasive.
According to management, this was due to peak output being shifted to 1Q2022 from the prior quarter, 4Q2021. If this is the case, shouldn’t we see a similar impact this quarter with peak production bought forward? Or is this increase in production a one-time occurrence?
In any case, it doesn’t bode well for the company’s Q1 profits, and I don’t think it’s a very good explanation for the dip.
Broadly speaking, most of the group’s business units are seeing reduced end-consumer demand, which has hurt revenue. Suppose it is true that we will enter a recession soon, with pockets tightening, or that the Chinese economy’s recovery will be slower than predicted. In that case, we can expect a prolonged impact on the company’s top and bottom lines.
A recurring concern for Nanofilm
Looking at Nanofilm’s past reports, this issue was not new and had already been brought to investors’ attention in previous company reports.
From the charts provided, it is evident that the company’s revenue has been experiencing negative growth since the second half of FY2022, a stark contrast to its performance since its IPO.
So what changed?
Despite management and investors expecting a faster recovery, the latest report confirms that the same challenges cited a few months ago are still playing out.
As a result, investors are realizing that the company may not be able to overcome these issues as quickly as previously hoped, leading to lowered expectations.
Bright spots for Nanofilm still exists
Nonetheless, for those able to see beyond its short-term issues, Nanofilm could bring a lot to the table with several critical moves it is taking.
- Geographical diversification
Nanofilm is expanding its operations to other strategic locations as part of its expansion plan. This includes setting up a coating services facility in Japan, acquiring land in Vietnam, and expanding its production capacity in China. The addition of a new smaller production site in Huizhou and the Zigong site, under its joint venture ApexTech, will address market opportunities in Southern China and advanced batteries for EVs, respectively.
- New Segments with capability & product expansion
Nanofilm is developing new projects for optical applications in 3C devices, with initial small production volumes in FY2023. If successful, mass production will commence in 2024 or 2025.
- R&D and Engineering Product Development
Despite the challenging operational environment, Nanofilm is committed to spending more than 5% of its total revenue on R&D and engineering. The group’s core nanotechnology is centered around its self-built proprietary equipment, which has led to many breakthroughs. Nanofilm continues to strengthen its in-house R&D and engineering to extend its deep-tech platform and has been in talks with a local university to collaborate on R&D efforts.
Overall, while there may be short-term challenges that Nanofilm is currently facing, its strategic expansion, commitment to innovation, and investment in R&D and engineering are all promising developments that could potentially set the company on a better path for long-term growth and success.
Nanofilm’s Share Buyback: A Sign of Undervaluation?
The recent share buyback by Nanofilm may also indicate that the company is undervalued in the market, and investors may be missing out on a potential opportunity.
With the purchase of more than 3 million shares in the last 2 trading days, which represents around 0.5% of the total available shares, the company is signaling that it believes its stock is worth more than the current market price.
This move by Nanofilm could also be seen as a vote of confidence in the company’s long-term prospects. By repurchasing its own shares, the company is effectively reducing the number of shares outstanding, which could lead to an increase in earnings per share in the future. This could potentially attract more investors to the stock, further driving up its value.
However, it is important to note that share buybacks alone do not guarantee an increase in stock price or future success for the company. There could be other factors at play, which we have discussed above.
Therefore, it is crucial to conduct thorough research and analysis before making any investment decisions.
Should you invest in a beaten-down Nanofilm?
In conclusion, making a decision on whether to invest in Nanofilm requires a thorough analysis of the company’s performance, management’s goals, and overall market conditions.
With its revenue growth slowing down and challenges persisting, it’s understandable that some investors may have doubts about the company’s ability to meet its ambitious revenue target of S$500 million by 2025.
However, it’s worth noting that Nanofilm is taking steps to address its challenges, such as expanding its operations to other strategic locations, developing new segments with capability and product expansion, and investing in R&D and engineering product development. Moreover, the company’s recent share buyback indicates that management believes the stock is undervalued, which may suggest an opportunity for investors.
If you’re still on the fence about investing in Nanofilm, you may want to wait until the upcoming AGM for more information. Ultimately, whether you invest in Nanofilm or not should be based on your own assessment of the company’s prospects and your investment goals.