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Tue, October 27, 2020 – 5:50 am
The market is in turmoil over a technology initial public offering (IPO), raising the question of whether a deal is worth investing in money.
Nanofilm Technologies International, the spin-off company of Nanyang Technological University (NTU), presented its final prospectus on Friday, offering 77.2 million shares at S $ 2.59 each for placement in its IPO. Including the sale of 104.3 million key shares, the company will collect gross proceeds of S $ 470.1 million.
The anticipation is justifiable. After all, Nanofilm’s successful listing will make it the first tech unicorn on the local exchange. It will also be Singapore’s first motherboard listing since March and one of the largest non-Reit (real estate investment trusts) listings in recent years.
Based on its placement price, Nanofilm’s market capitalization will be approximately S $ 1.7 billion after placement. The IPO is priced at around 46 times earnings based on its fully diluted and adjusted earnings per share of 5.57 Singapore cents for the 2019 financial year.
That’s somewhat higher than what Singaporean investors may be used to, but the company is also not the type that investors here would have had many opportunities to invest in.
Nanofilm, which specializes in advanced materials and nanoproducts, derives 77 percent of its revenue from its advanced materials business unit. Provides protective coating services for devices such as smartphones, laptops, and other electronic devices. Its other two business units are nanofabrication and industrial equipment.
The company’s fundamentals will potentially be attractive to investors with an appetite for growth stocks in the tech space, which are few and far between on the Singapore Stock Exchange.
During the first half of 2020, Nanofilm’s net profit grew 62.3 percent year-on-year to S $ 18.5 million. Revenue for the semester was up 40.9 percent to S $ 77.8 million.
For the 2019 fiscal year ending December 31, net income increased 22.2 percent to S $ 35.8 million. Revenue increased 16.4 percent to S $ 142.9 million.
As of June 30, 2020, the company had a net cash position of S $ 14.9 million. In its prospectus, Nanofilm said that this will give it the financial flexibility to invest and finance future growth, as well as some room to take on additional debt.
The company expects to benefit from a growing market for advanced materials.
The size of the global advanced materials market increased from $ 16.5 billion in 2016 to $ 19.1 billion in 2019, registering a compound annual growth rate (CAGR) of around 5%, according to consultancy Frost & Sullivan. The segment is expected to grow at a CAGR of 7.5 percent between 2020 and 2023 to reach $ 24.3 billion.
Nanofilm has the backing of CEO 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 started when Dr. Shi spearheaded research on the now patented Filtered Cathodic Vacuum Arc (FCVA) coating technology in 1994. Little did he know it would be released to the corporate world when FCVA technology sparked the interest of the Japanese conglomerate Hitachi they wanted to adopt coating technology for their hard drives.
In an attempt to commercialize the technology, Nanofilm was founded with an initial capital of S $ 300,000.
FCVA technology allows vacuum coating deposition to take place at room temperature and has the ability to modify the surface properties of metallic, ceramic and even plastic materials.
This innovation, along with other proprietary Nanofilm advanced materials, is not easily replaced by other conventional technology providers, according to Frost and Sullivan, putting Nanofilm in a favorable position when it comes to retaining customers.
Nanofilm’s prospectus revealed that it has about 300 clients in multiple industries. Among them are manufacturers of cell phones, cars and cameras. Some key clients the company has been in business with for more than a decade include Fuji Xerox, Nikon, and Canon.
That said, a key risk Nanofilm faces is its reliance on a small number of core clients.
His largest client, who is not named, accounted for about half of his income in recent years. During the six months ending June 30, 2020, the particular customer contributed 56.5 percent of Nanofilm’s revenue. Meanwhile, its top five clients accounted for about 81.9 percent of its revenue during the half.
Furthermore, Nanofilm’s patents and copyrights run the risk of being challenged or infringed by third parties, which could harm its business, the firm said in its prospectus.
However, compared to competitors elsewhere, Nanofilm has done well.
According to data from Frost & Sullivan, Nanofilm’s Ebitda margins (earnings before interest, taxes, depreciation and amortization) were between 40 and 41 percent between 2017 and 2019. The main market players in the same space as they had a median margin of about 24.6 percent.
In an environment where tech stocks have been gaining traction, Nanofilm’s IPO is destined to be one that the market will closely monitor.
Additionally, the company’s financial report currently points to a quality company that is well positioned to benefit from growth trends in the technology sector.
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