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5 Things to Know about Nanofilm Technologies’ IPO

Singapore Exchange Limited (SGX: S68), or SGX, has struggled to attract companies to list on its platform.

The bourse operator only managed to attract six listings this year, and five of these took place in the first quarter of 2020 before the pandemic hit.

SGX’s luck may be about to change, though.

Nanofilm Technologies, a nanotechnology-driven company that deals with advanced materials, has registered its final prospectus for a listing on the local bourse.

The business has three key divisions, namely advanced materials, nanofabrication and industrial equipment.

The company plans to raise around S$190.9 million by selling 77.2 million shares at an IPO price of S$2.59 per share.

Another 104.3 million shares are also being sold by the founder, Shi Xu, the CEO Lee Liang Huang and a company executive Wei Hao.

These executives will receive S$157.7 million, S$25.9 million and S$16.3 million, respectively.

This IPO has also injected a breath of fresh air into the bourse and has re-ignited talk of more potential listings that may be coming along.

Here are five aspects of the company that you should know about.

Consistent track record of growth

Nanofilm has demonstrated a consistent growth track record, with revenue and net profit rising steadily year on year.

Revenue rose from S$103.6 million in 2017 to S$142.9 million in 2019, with mid to high-teens percentage year on year growth.

Over the same period, net profit also rose from S$26.9 million to S$34.5 million over the same period.

For the first six months of 2020, revenue jumped sharply by 40.9% year on year to S$77.8 million, while net profit soared 70.6% year on year to S$18.5 million.

These impressive numbers are a testament to the company’s ability to grow both its top and bottom-line even amid this crisis.

High gross and net margins

The company also boasts high gross and net margins.

Gross margin for the three years 2017-2019 averaged 54.7%, while net margin ranged between 24% to 26%.

These are impressive margins for an engineering company and these numbers show that the business has pricing power in a specialised, niche industry.

The gross margin did dip slightly in the first half of 2020, falling to 52.6%.

However, the net margin remained high at 23.8%, an indication of effective expense control.

High margins are beneficial for a company as it provides it with more buffer in case of downturns or a fall in demand.

A large total addressable market

The total addressable market (TAM) for a company is a measure of the potential business that all players within the industry can capture.

In a nutshell, if the TAM for an industry continues to grow, this means that all companies within the industry stand to benefit too.

For Nanofilm, its largest division is that of advanced materials, where it believes its vacuum coating technologies and advanced materials deliver significant advantages to clients compared to conventional methods.

For 2019, this division made up three-quarters of total revenue and in the first half of 2020, it took up a significant 82% of total revenue.

Frost and Sullivan, an independent market research firm, estimates that the TAM for advanced materials is around US$19.5 billion for 2020.

This TAM is set to grow at an annual rate of 7.5% to reach US$24.3 billion by 2023.

Nanofilm’s 2019 advanced materials division revenue makes up just 0.4% of the estimated TAM for 2020, indicating that there is much more room for it to grow significantly in future.

Reputable client base

Nanofilm has over 300 customers from various industries and has decade-long relationships with a few key customers.

Some of these customers are big names in the information technology and optical industries.

The company has a 14-year business relationship with Fuji Xerox, a 13-year relationship with Nikon Corp (TYO: 7731) and a 12-year relationship with Sunny Optical (SEHK: 2382).

It also has a 5-year and 4-year relationship with Microsoft (NASDAQ: MSFT) and Huawei, respectively.

Lofty valuation

Earnings per share adjusted for dilution from the conversion and cornerstone shares plus the IPO offering stands at S$0.0305 for the first half of 2020.

When annualised, this amounts to around S$0.061.

The forward price-earnings ratio for the company’s shares is thus around 42 times.

Investors need to decide if the potential growth of the company is attractive enough to warrant this lofty valuation.

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Disclaimer: Royston Yang owns shares in Singapore Exchange Limited.