Edison Investment Research
November 21, 2016
Thinfilm (THIN) continues to report significant advances on an almost weekly basis. In October it took the keys to its new San Jose facility and recent milestones include new pilot orders in gemstones (Sarine Technology) and food (olive oil) and a partnership to produce combined hologram/NFC document authentication tags. We have cut our near-term earnings forecasts as THIN no longer intends to further de-bottleneck its existing plant (with short-term revenue implications), but our DCF valuation has risen 15% to NOK8.58/share, reflecting the expected boost to long-term cash flows from the greatly increased capacity/reduced cost expectations from the planned new roll-to-roll (R2R) production line.
Q3 cash burn down helped by lower R&D
In Q316 Thinfilm’s revenue dropped 20% y-o-y to $0.8m, reflecting a hiatus in EAS orders from Nedap’s fashion clients. Helped by falling R&D costs, reported operating loss fell from $10.5m to $9.8m and, helped by slow growth in working capital, cash burn declined from $12.8m in Q2 to $9.9m. Net cash balances at end Q3 totalled $27.1m (end Q2: $36.8m), which we see as sufficient to last into Q217.
Earnings revised to reflect increased capacity plans
With the decision to move forward on implementing the new 5.0bn unit R2R line (previously expected to have a 1.0bn unit capacity) in late 2017, we have increased our longer-term earnings forecasts and amended our capex forecast. This reflects the opportunity arising from sharply lower (c 10x) production costs, lower price points and resulting prospective gains in market shares and revenues. Nevertheless, prior to the new line becoming fully operational in H218 we have cut earnings expectations, as debottlenecking plans for the existing plant that would have increased revenue generation potential in the short term have been shelved.