Nanofilm IPO a play on growth stocks in tech space

THE market is abuzz over a hot tech initial public offering (IPO), raising the question of whether it's a deal worth putting money into.

Nanofilm Technologies International, the spin-off company of Nanyang Technological University (NTU), on Friday lodged its final prospectus, offering 77.2 million shares at S$2.59 each for placement in its IPO. Including the sale of 104.3 million cornerstone shares, the company will raise gross proceeds of S$470.1 million.

The anticipation is justifiable. After all, the successful listing of Nanofilm will make it the first tech unicorn on the local bourse. It will also be Singapore's first mainboard listing since March and among the largest non-Reit (real estate investment trust) listings in recent years.

Based on its placement price, Nanofilm's market capitalisation will be about S$1.7 billion post-placement. The IPO is priced at around 46 times' earnings based on its fully diluted, adjusted earnings per share of 5.57 Singapore cents for the financial year 2019.

That is somewhat higher than Singapore investors may be used to, but the company is also not the type that investors here would have had a lot of opportunity to invest in.

Nanofilm, which specialises in advanced materials and nanoproducts, derives 77 per cent of its revenue from its advanced materials business unit. It provides protective coating services for devices such as smartphones, laptops and other electronics. Its two other business units are nanofabrication and industrial equipment.

The fundamentals of the company will potentially be attractive for investors who have an appetite for growth stocks in the tech space, which are few and far between on the Singapore Exchange.

For the first half of 2020, Nanofilm's net profit grew 62.3 per cent year on year to S$18.5 million. Revenue for the half year climbed 40.9 per cent to S$77.8 million.

For the fiscal year 2019 ended Dec 31, net profit rose 22.2 per cent to S$35.8 million. Revenue was up 16.4 per cent to S$142.9 million.

As at June 30, 2020, the company had a net cash position of S$14.9 million. In its prospectus, Nanofilm said this will give it the financial flexibility to invest and fund future growth as well as some leeway to take on additional debt.

The company is expecting to benefit from a growing advanced materials market.

The global market size for advanced materials increased from US$ 16.5 billion in 2016 to US$19.1 billion in 2019, registering a compounded annual growth rate (CAGR) of around 5 per cent, according to consulting firm Frost & Sullivan. The segment is expected to grow at a CAGR of 7.5 per cent between 2020 and 2023 to reach US$24.3 billion.

Nanofilm is backed by executive chairman Shi Xu, who founded the company in 1999 when he was an associate professor at NTU's School of Electrical and Electronic Engineering.

It all began with Dr Shi spearheading the research in the now patented filtered cathodic vacuum arc (FCVA) coating technology in 1994. Little did he know he would be thrust into the corporate world when the FCVA technology sparked the interest of Japanese conglomerate Hitachi, which wanted to adopt the coating technology for its hard disk drives.

In a bid to commercialise the technology, Nanofilm was founded with a start-up capital of S$300,000.

The FCVA technology allows vacuum coating deposition to be performed at room temperature and has the capability to modify surface properties of metal, ceramic and even plastic materials.

This innovation, along with Nanofilm's other proprietary advanced materials, are not easily replaced by other conventional technology providers, according to Frost and Sullivan, which places Nanofilm in a favourable position when it comes to retaining customers.

Nanofilm's prospectus revealed that it has some 300 customers in multiple industries. Among them are makers of mobile phones, automobiles and cameras. Some key customers, which the company has been in business with for over a decade, include Fuji Xerox, Nikon, and Canon.

That said, one key risk Nanofilm faces is its reliance on a small number of core customers.

Its largest customer, which is not named, accounted for about half of its revenue over the past few years. For the six months ended June 30, 2020, the particular customer contributed 56.5 per cent of Nanofilm's revenue. Meanwhile, its top five customers made up some 81.9 per cent of its revenue for the half-year.

In addition, Nanofilm's patents and copyrights risk being challenged or infringed by third parties, which could potentially hurt its business, said the firm in its prospectus.

Benchmarked against competitors elsewhere, however, Nanofilm has done well.

According to data by Frost & Sullivan, Nanofilm's Ebitda (earnings before interest, taxes, depreciation and amortisation) margins stood at around 40 to 41 per cent between 2017 and 2019. Leading market players in the same space that had an average margin of around 24.6 per cent.

In an environment in which tech stocks have been gaining traction, Nanofilm's IPO is set to be one that the market will keep a close eye on.

Moreover, the firm's financial report card currently points towards a quality company that is well-positioned to benefit from growth trends in the tech sector.