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Apple’s introduction of native NFC support in the iPhone models launched this month is a key development for Thinfilm. First, it makes it easier for consumers with these models to tap and read NFC tags, removing an inhibitor to adoption. Second, it indicates that Apple is becoming more supportive of a consumer-friendly NFC ecosystem. The initial reaction from Thinfilm’s customers to the announcement appears to be very positive. Because it will take time for this heightened interest to convert to potential orders, we leave our estimates and valuation broadly unchanged.
Written by
Thin Film Electronics |
New Apple phones show enhanced NFC support |
Industry update |
Tech hardware & equipment |
19 September 2018 |
Share price performance
Business description
Next events
Analysts
Thin Film Electronics is a research client of Edison Investment Research Limited |
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Apple’s introduction of native NFC support in the iPhone models launched this month is a key development for Thinfilm. First, it makes it easier for consumers with these models to tap and read NFC tags, removing an inhibitor to adoption. Second, it indicates that Apple is becoming more supportive of a consumer-friendly NFC ecosystem. The initial reaction from Thinfilm’s customers to the announcement appears to be very positive. Because it will take time for this heightened interest to convert to potential orders, we leave our estimates and valuation broadly unchanged.
Year end |
Revenue ($m) |
EBITDA* |
PBT* |
EPS* |
DPS |
EV/sales |
12/16 |
3.8 |
(36.9) |
(42.8) |
(6.5) |
0.0 |
23.9 |
12/17 |
5.9 |
(50.9) |
(57.5) |
(6.6) |
0.0 |
15.4 |
12/18e |
5.4 |
(49.5) |
(54.2) |
(4.6) |
0.0 |
16.9 |
12/19e |
34.5 |
(43.3) |
(51.3) |
(4.4) |
0.0 |
2.6 |
Note: *EBITDA, PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
New iPhone models improve NFC usability
All three of the Apple iPhone models launched this month (iPhone XS, XS Max and XR) will support native background NFC tag read functionality. This means users with these new iPhones will not have to launch a dedicated app to tap and read a NFC tag as they are obliged to do on the iPhone X. The cumbersomeness of this approach has been cited by Thinfilm as a major inhibitor to adoption (see our August note). Moreover, while Android phones need to be unlocked before tapping, we understand the new model iPhones will not have to be unlocked, so iOS is overtaking Android with regards to NFC ease of use.
Apple attitude to NFC more positive
The initial reaction from Thinfilm’s customers indicates they see Apple’s announcement as a sign that Apple wants its phone users to start scanning NFC tags. This is encouraging brand owners to take a more serious interest in NFC marketing. However, for Thinfilm to derive maximum benefit from this interest, Apple needs to support the non-standard tags talk first (TTF) NFC protocol deployed in Thinfilm’s printed tags, thus justifying the investment in a roll-to-roll facility for manufacturing these tags in high volume. Together with a number of major semiconductor players, Thinfilm has submitted the TTF protocol for inclusion within the NFC standard to the NFC Forum. Inclusion of TTF within the NFC standard, which management anticipates will be decided by end 2019, should encourage Apple to provide TTF support. We note the recent appointment of Thinfilm employee Cosmin Pascu as vice-chair of the NFC Compliance Committee.
Valuation: Substantial upside potential, execution key
We leave our estimates unchanged at this stage, although we note that this development should provide support to our mid-term forecasts. Following the strengthening in the US$/NOK exchange rate since our last note, we adjust our base case indicative valuation from NOK1.92/share to NOK1.86/share.
Increasing penetration of Apple customer base
At the moment Apple models preceding the iPhone X do not support NFC (see Exhibit 1). At this stage, it is unclear whether it will be technically possible to retroactively implement support on the installed base of iOS device. Even if this were possible, we have no visibility on whether Apple has any intention of doing this. This means that for now there is still a significant proportion of iPhones in use that cannot tap and read tags deploying standard NFC protocol. This proportion will reduce year by year as users upgrade. Also, it is possible that the inclusion of native NFC support on the three new models will encourage existing iPhone X users to download the app required and start tapping tags. However, even though NFC tapping activity is restricted to a sub-set of iPhone users, the recent announcement from Apple appears to have triggered a fresh wave of interest in NFC from brand owners. Firstly, they seem less interested in the absolute proportion of iPhone users with NFC compatible models than the overall direction of travel, which is towards greater use of NFC, and they want to be amongst the first to embrace the technology. Secondly, many brand owners are keen to engage with aspirationals who tend to change their phones more often and want the latest models which are the ones with NFC support.
No Apple phones currently support the TTF protocol used in Thinfilm’s printed tags. This means that for campaigns addressing both Android and iOS users, Thinfilm supplies silicon tags manufactured by third parties and programmed for use with its proprietary CNECT software platform. This enables the company to participate in the increasing demand for NFC tags despite the lack of Apple support for the TTF protocol. Once Thinfilm’s new roll-to-roll manufacturing facility is outputting high volumes of printed tags, which we expect will take place during FY19, it is important that the printed tags are Apple compatible as well. Management’s preferred strategy for achieving this is to get the TTF protocol embedded in the NFC standard but, as discussed in our July note, it is pursuing other options in parallel to ensure it achieves this vital objective.
Exhibit 1: NFC support
Phone type |
Phone locked |
Phone unlocked |
Requires App download |
Standard NFC |
|||
Earlier iPhone models |
No |
No |
N/A |
iPhone X |
No |
Yes |
Yes |
iPhone XS, XS Max and XR |
Yes |
Yes |
No |
NFC enabled Android devices |
No |
Yes |
No |
TTF NFC |
|||
iPhone – all models |
No |
No |
N/A |
NFC enabled Android devices |
No |
Yes |
No |
Source: Edison Investment Research
Exhibit 2: Financial summary
US$000s |
2016 |
2017 |
2018e |
2019e |
2020e |
|
Year end December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|
PROFIT & LOSS |
USD |
USD |
USD |
USD |
USD |
|
Revenue |
|
3,845 |
5,907 |
5,422 |
34,528 |
141,092 |
EBITDA |
|
(36,873) |
(50,867) |
(49,492) |
(43,343) |
15,723 |
Operating Profit (norm, before amort. and except.) |
|
(40,049) |
(57,858) |
(54,280) |
(50,255) |
8,618 |
Intangible Amortisation |
0 |
0 |
0 |
0 |
0 |
|
Exceptionals |
0 |
0 |
0 |
0 |
0 |
|
Share-based payments |
(1,433) |
(2,220) |
(1,390) |
(1,390) |
(1,390) |
|
Operating Profit |
(41,482) |
(60,078) |
(55,670) |
(51,645) |
7,228 |
|
Net Interest |
(2,731) |
374 |
65 |
(1,002) |
(2,041) |
|
Profit Before Tax (norm) |
|
(42,780) |
(57,484) |
(54,215) |
(51,257) |
6,577 |
Profit Before Tax (FRS 3) |
|
(44,213) |
(59,704) |
(55,605) |
(52,647) |
5,187 |
Tax |
(282) |
122 |
0 |
0 |
0 |
|
Profit After Tax (norm) |
(43,062) |
(57,362) |
(54,215) |
(51,257) |
6,577 |
|
Profit After Tax (FRS 3) |
(44,495) |
(59,582) |
(55,605) |
(52,647) |
5,187 |
|
Average Number of Shares Outstanding (m) |
659.1 |
862.7 |
1,172.0 |
1,172.0 |
1,172.0 |
|
EPS - normalised (c) |
|
(6.5) |
(6.6) |
(4.6) |
(4.4) |
0.6 |
EPS - (IFRS) (c) |
|
(6.8) |
(6.9) |
(4.7) |
(4.5) |
0.4 |
Dividend per share (c) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
EBITDA Margin (%) |
N/A |
N/A |
N/A |
N/A |
0.1 |
|
Operating Margin (before GW and except.) (%) |
N/A |
N/A |
N/A |
N/A |
6.1 |
|
BALANCE SHEET |
||||||
Fixed Assets |
|
24,903 |
34,246 |
53,382 |
55,044 |
51,677 |
Intangible Assets |
3,142 |
2,190 |
3,686 |
5,332 |
7,142 |
|
Tangible Assets |
9,155 |
20,522 |
39,234 |
40,322 |
36,218 |
|
Investments |
12,607 |
11,534 |
10,462 |
9,390 |
8,318 |
|
Current Assets |
|
79,231 |
115,074 |
33,678 |
24,928 |
50,773 |
Stocks |
1,086 |
709 |
891 |
5,676 |
23,193 |
|
Debtors |
3,940 |
16,245 |
891 |
5,676 |
23,193 |
|
Cash |
74,205 |
98,120 |
31,896 |
13,576 |
4,386 |
|
Other |
0 |
0 |
0 |
0 |
0 |
|
Current Liabilities |
|
(7,789) |
(7,320) |
(891) |
(46,676) |
(64,193) |
Creditors |
(7,789) |
(7,320) |
(891) |
(5,676) |
(23,193) |
|
Short term borrowings |
0 |
0 |
0 |
(41,000) |
(41,000) |
|
Long Term Liabilities |
|
(12,850) |
(12,125) |
(11,581) |
(11,037) |
(10,493) |
Long term borrowings |
(12,581) |
(12,125) |
(11,581) |
(11,037) |
(10,493) |
|
Other long term liabilities |
(269) |
0 |
0 |
0 |
0 |
|
Net Assets |
|
83,495 |
129,875 |
74,587 |
22,259 |
27,764 |
CASH FLOW |
||||||
Operating Cash Flow |
|
(37,412) |
(52,281) |
(40,749) |
(48,128) |
(1,795) |
Net Interest |
88 |
343 |
65 |
(1,002) |
(2,041) |
|
Tax |
(118) |
(38) |
0 |
0 |
0 |
|
Capex |
(5,350) |
(27,107) |
(24,996) |
(9,646) |
(4,810) |
|
Acquisitions/disposals |
0 |
0 |
0 |
0 |
0 |
|
Financing |
101,124 |
103,285 |
0 |
0 |
0 |
|
Dividend payments and Other items |
(67) |
170 |
0 |
0 |
0 |
|
Net Cash Flow |
58,265 |
24,372 |
(65,680) |
(58,776) |
(8,646) |
|
Opening net debt/(cash) |
|
(15,940) |
(61,624) |
(85,995) |
(20,315) |
38,461 |
Finance leases initiated |
(12,581) |
0 |
0 |
0 |
0 |
|
Other |
0 |
0 |
0 |
0 |
0 |
|
Closing net debt/(cash) |
|
(61,624) |
(85,995) |
(20,315) |
38,461 |
47,107 |
Source: Edison Investment Research
|
|
Research: Investment Companies
Fidelity Japan Trust (FJV) has a bottom-up, research-intensive investment process, a flexible approach to gearing and a focus on stocks across the market cap spectrum that offer growth at a reasonable price (GARP). Lead manager, Nicholas Price, has just notched up three years in charge, but has been with Fidelity in Japan for 25 years, first as part of the well-resourced analyst team and later as a portfolio manager across a range of mandates. FJV was known as Fidelity Japanese Values until May 2018, but changed its name as one of a number of administrative changes designed to align with the trust’s all-cap, growth-focused strategy. Short- and longer-term performance have been strong, both in absolute terms and relative to indices; the discount widened over the summer while NAV performance remained positive, supporting near-term re-rating potential.