Nanofilm Technologies Announced a European Acquisition: Can its Share Price Rebound?

It was a tough year for Nanofilm Technologies International (SGX: MZH) in 2023.

Shares of the nanotechnology specialist have fallen by nearly a third last year led by lower demand for the group’s products amid a slump in the electronics sector.

Things could be looking up this year, though.

Nanofilm just announced the acquisition of AxynTec for €6.8 million to spearhead its European expansion.

With this acquisition, could the group’s share price see a rebound in 2024?

Details of the acquisition

AxynTec provides thin-film coating solutions to the consumer, industrial and medical industries and supplies coating equipment and systems.

The German company uses its patented, innovative thin-film technologies that have obtained ISO Certifications such as DIN ISO 13485 and DIN EN ISO 9001.

Led by founders Dr Schey and Dr Hammerl, both will remain as managing directors after the sale and continue to perform their managerial duties.

Nanofilm believes that this acquisition provides a great opportunity for the group to launch its new base of operations in Europe while providing ready access to AxynTec’s pool of European customers.

In addition, AxynTec’s Diamond-Like Carbon (DLC) equipment and DLC advanced materials are complementary to Nanofilm’s Physical Vapour Deposition equipment and coating portfolio.

AxynTec has a proven track record in Southern Germany, Austria and Switzerland and its portfolio allows Nanofilm to provide a more comprehensive suite of solutions to existing and potential customers.

Looking for green shoots

Nanofilm’s latest financial results showed the effects of a challenging operating environment coupled with dampened consumer sentiment.

For the first nine months of 2023 (9M 2023), group revenue fell by 29% year on year to S$128 million.

There was a silver lining, though.

For the third quarter of 2023 (3Q 2023), there was an improvement in operational performance with a gross margin above 40%, higher than the 32% logged in the first half of 2023.

3Q 2023’s operating expenses also fell 10% year on year in line with the group’s cost-control efforts.

Nanofilm was profitable for 3Q 2023 and generated positive operating cash flow for the quarter.

For 2024, Nanofilm will look for green shoots while relying on its sales strategy and business initiatives.

As revenue picks up, the group will then enjoy higher operating leverage that will lift its profitability.

Forging ahead with expansion plans

This European acquisition is part of Nanofilm’s broad-based plans to forge ahead with its expansion despite the difficult conditions.

Last year saw the nanotechnology group expand into various sites to capture market opportunities.

Its Vietnam Site 2 phase one is undergoing construction followed by renovation and fittings and should be operational by the first quarter of this year (1Q 2024).

Elsewhere, Nanofilm’s Indian subsidiary is being trained alongside the site’s preparation and looks ready to commence a small operation by 1Q 2024.

The group’s joint venture, ApexTech, is undergoing customer qualification at the component level for electric vehicle busbar connectors but is facing slow progress due to market weakness.

Still, ApexTech continues to explore the application of its green plating solutions with potential customers.

It is encouraging to note that Nanofilm is pursuing ongoing expansion amid a general slowdown in demand for its products and solutions.

However, investors should understand that these business initiatives require a gestation period and may not be immediately profitable.

Still, these efforts should result in a larger addressable market for the group as it seeks to expand in different parts of the world.

A sizable market opportunity

Speaking of addressable markets, the acquisition of AxynTec serves as a springboard for Nanofilm to access the lucrative European market.

The total addressable market for Europe is estimated at €13 billion, of which the serviceable obtainable market (i.e. the market that Nanofilm can target) is around €400 million.

This market size represents a significant opportunity for Nanofilm to grow its top line and the industry also has an expected growth rate of 10% per annum.

Nanofilm’s first step is to use Germany as a leading market for its European expansion, and then conduct site assessments to identify potential acquisition opportunities for further growth.

Get Smart: Patience is required

The purchase of AxynTec is a small step forward for Nanofilm in realising its European expansion goal.

However, patience is needed for the recovery to take place and lift Nanofilm’s fortunes.

The good news is that the ongoing expansions in Vietnam, India and Germany should set the stage for a meaningful rebound once it arrives.

In the meantime, investors need to monitor developments closely to wait for the eventual upturn.

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Disclosure: Royston Yang does not own shares in any of the companies mentioned.

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