Nanofilm Technologies (SGX: MZH) is having a tough time this year.
The nanotechnology specialist just released a profit guidance last month warning of a net loss for its fiscal 2023’s first half (1H 2023) results.
The group’s share price has also slid 26.1% year-to-date to close at a 52-week low of S$1.02 and is also more than 60% down from its IPO price of S$2.59 back in late 2020.
Nanofilm recently released its 1H 2023 earnings and although the financial numbers did not look pretty, the group expressed optimism for its long-term prospects.
Here are five highlights from the growth company’s latest results that investors should take note of.
1. A net loss with negative free cash flow
The weak demand across Nanofilm’s end consumer markets has taken a toll on the group’s financials.
For 1H 2023, revenue fell 34.4% year on year to S$73.2 million with year-on-year revenue declines reported across all three of its core divisions.
Gross profit contracted by 53.1% year on year to S$23.4 million as gross margin declined sharply from 44.9% to 32%.
Selling and distribution expenses dipped by just 1.4% year on year to S$3.7 million.
On the other hand, administrative expenses shot up 18.1% year on year to S$21.9 million because of additional depreciation for its Singapore corporate office, professional consultancy fees, and write-off of fixed assets.
With lower revenue and increased expenses, Nanofilm reported a net loss of S$7.6 million, a sharp reversal from the S$18.8 million net profit a year ago.
Free cash flow for 1H 2023 also turned negative, coming in at minus S$1.4 million as the group spent a total of S$31.4 million on capital expenditure.
It was a sharp contrast from last year’s positive free cash flow of S$11.3 million.
An interim dividend of S$0.0033 was declared, down from the S$0.011 paid out in 1H 2022.
2. Weaker numbers across all three core divisions
All three of Nanofilm’s core divisions reported year-on-year revenue declines except for its newest business unit (BU) Sydrogen.
Its largest division, Advanced Materials BU (AMBU), saw revenue fall 29.9% year on year to S$59.3 million.
AMBU witnessed a weak electronics market that resulted in inventory reduction for its customers.
The division also suffered from a tough comparable as 1H 2022 registered a strong performance from spillover production.
On a positive note, efforts to grow its industrial sub-segments have bore fruit, with a 15% year-on-year revenue growth led by a rebound in printing and imaging and the increased adoption of precision engineering applications.
The automotive segment also recorded a robust 25% year on year jump in revenue arising from a rebound in the commercial vehicle market.
Nanofilm’s second-largest division, Industrial Equipment Business Unit (IEBU), saw revenue plunge 54.5% year on year to S$8.9 million.
Its smallest core division, Nanofabrication Business Unit (NFBU), saw a 36.2% year on year decline in revenue to S$4.7 million.
Both IEBU and NFBU saw softer demand from clients as capital expenditure budgets were tightened.
3. Capitalisation of research and development expenses
The group is seeing more of its research and development (R&D) expenses being capitalised as assets on its balance sheet as these efforts get closer to achieving commercial benefit.
Financial explainer: A business is allowed to “capitalise” R&D as an investment rather than an expense if these expenses produce future economic benefits.
For 1H 2023, Nanofilm capitalised S$8.6 million of R&D expenses compared with just S$4.1 million in 1H 2022.
As a deep technology and material science company, R&D makes up an integral aspect of the group’s competitive edge.
4. Continued investments amid strategic expansion
Despite the weak results, Nanofilm will continue to invest in its capabilities and execute its strategic initiatives.
AMBU is expanding to new sites in Vietnam and India and its industrial teams are looking to expand into new market segments such as green plating of electric vehicle battery connectors and functional coating of PCB (printed circuit board) drills.
IEBU will look towards expanding its product line offerings while NFBU will focus on bringing projects to mass production.
NFBU’s Nanofab Engineering Centre for new product development will also be completed by the end of 2023 at its Tai Seng Singapore headquarters.
5. A cautious business outlook
Management expects the challenging business environment to persist, particularly for IEBU where customers are still holding back on their investments.
Profitability for 2023 will hinge on the level of demand from end customers for their upcoming new product launches.
It will also depend on whether capital expenditure budgets are further tightened.
In the longer term, Nanofilm remains confident of its prospects.
For 2024, new segments will also provide much-needed new revenue streams for the group.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
