UOB Kay Hian (UOBKH) upgraded its call on Nanofilm Technologies : MZH 0% from “sell” to “hold” and raised its target price to S$1.28 from S$1.02 previously.

The target price is based on 18 times the brokerage’s estimated FY2023 earnings per share for the group, higher than its previous valuation of 11 times. It is also pegged to one standard deviation point less of the stock’s long-term mean.

On Thursday (Feb 23), UOBKH analyst John Cheong said that the increase in valuation multiple is due to a less challenging outlook for 2023.

While Nanofilm’s FY2022 results missed his expectations by 16 per cent, he remains optimistic about the group’s longer-term outlook. This comes as some of the productions of Nanofilm’s multiple new projects, under new product introductions or initial production builds, are expected to contribute meaningfully in 2024 onwards.

UOB Kay Hian’s revised earnings estimates indicated year-on-year earnings growth of 7 per cent for FY2023 and 54 per cent for FY2024. This comes even after the research house slashed FY2023 and FY2024 Nanofilm earnings forecasts by 24 per cent and 4 per cent, as well as revenue forecasts by 13 per cent and 1 per cent.

Even though revenue for Nanofilm’s industrial equipment business unit declined in FY2022, Cheong noted that the company has been extending its portfolio of large inline-coating systems for high-volume production to support the growth of internal business units. 

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Nanofilm’s China operations are also expected to experience a gradual recovery in the second half of the year, he said. Sydrogen Energy, the joint venture between Nanofilm and Temasek, was in the final testing stages of its coated bipolar plates, with mass production expected to commence in Shanghai in the second half of this year.

Although Nanofilm currently trades at 20 times the brokerage’s FY2023 price-to-earnings ratio estimates, which is at a premium to the stock’s Singapore peers multiple of nine times, Cheong noted that share price catalyst could come from better-than-expected ramp-up of the nanofabrication business. 

The nanofabrication business unit was the only segment to record a revenue growth, with a 145 per cent year-on-year increase.

Shares of Nanofilm were trading at S$1.43, up 1.4 per cent or S$0.02, as at Thursday’s midday break.