Edison Investment Research
December 21, 2016
Thin Film Electronics (THIN) has announced a private placement to raise NOK529m ($62.6m) at an issue price of NOK3.91 per share. The funds are to be used to prepare and equip the new roll-to-roll facility in San Jose as well as to cover operating costs in 2017 and 2018. Based on revised model assumptions, we estimate they should be sufficient to bridge all but $21m of Thinfilm’s future cash requirements ahead of it becoming free cash flow generative in 2019. As such, we expect this issue to greatly reduce investor concerns about future funding needs and potential further equity dilution. Adjusting for the increase in the number of shares, we have revised our DCF valuation by 5% from NOK8.58 to NOK8.19 per share.
New share issue supports key strategic objectives…
We have increased our estimate of cash burn in 2018 after revising down the expected speed of build-up to 5bn unit capacity during 2018 and 2019. When added to our pre-issue forecast of year-end cash reserves of $14m, we nevertheless estimate that the $60m equity issue proceeds net of fees should cover 79% (all but $21m) of our revised estimate of Thinfilm’s $94m funding requirements to free cash flow break-even in 2019.
…and should diminish investor dilution concerns
While our revised forecasts indicate the requirement for further funding in 2018, we concur with management’s assessment that it should be possible for Thinfilm to meet further funding needs from strategic partnerships, customer finance and/or exercise of existing warrants in 2018. As such, based on our current expectations we believe this issue significantly diminishes the likelihood that the company will need to make further equity issues.
Valuation: Dilution hit largely offset by lower WACC
With the above-mentioned changes to our forecast cash flows, arising from our more conservative take on the rate of growth of NFC-enabled label capacity in 2018 and 2019, our DCF valuation has fallen to NOK8.19 per share (from NOK8.58) to reflect the dilutive effect of the equity issue and earnings revisions. The impact of this revision and the 19.8% increase in shares is largely offset in our model by a reduction in the WACC from 15.0% to 14.5%. This reflects what we see as the substantial reduction in the perception of funding and future equity dilution risk that should arise from this placement.