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Thin Film Electronics — Update 19 May 2016

Thin Film Electronics — Update 19 May 2016

Thin Film Electronics

Analyst avatar placeholder

Written by

Thin Film Electronics

Getting the R2R ball rolling

R2R update/Q1 results

Tech hardware & equipment

19 May 2016

Price

NOK4.54

Market cap

NOK3,070m

NOK8.1554/US$

Net cash ($m) at end-Q116

49.1

Shares in issue

676.2m

Free float

84.0%

Code

THIN

Primary exchange

Oslo

Secondary exchange

OTCQX

Share price performance

%

1m

3m

12m

Abs

27.9

48.9

(32.7)

Rel (local)

25.6

40.5

(23.4)

52-week high/low

NOK6.7

NOK2.2

Business description

Thin Film Electronics (Thinfilm) commercialises printed electronics and owns key patents for printing rewritable, non-volatile memory and printable NFC circuits. It also licenses technology from others to develop complete printed systems.

Next events

Q216 results

12 August 2016

Q316 results

4 November 2016

Q416 results

24 February 2017

Analysts

Anna Bossong

+44 (0)20 3077 5737

Katherine Thompson

+44 (0)20 3077 5730

Thin Film Electronics is a research client of Edison Investment Research Limited

Thinfilm (THIN) has announced plans to commence R2R production by end-2017 and also plans to move to a larger plant in the US in 2017 to accommodate the line. We see the news as supportive of our NOK7.52 DCF valuation because of the prospects for greater efficiencies from the new plant. Nevertheless, we expect THIN to have to further de-bottleneck its existing sheet-based plant in 2016/17 in order to meet product demand, particularly for NFC OpenSense. In addition, property lease costs are expected to rise in 2017 with the opening of the new facility, leading us to increase our cash burn forecasts for 2016 and 2017 by $13m. Thinfilm’s Q116 earnings reflected the hiatus in EAS unit production in the first quarter, but were otherwise in line with expectations.

Year
end

Revenue
($m)

PBT*
($m)

EPS*
(c)

DPS
(c)

EV/sales
(x)

EV/EBITDA
(x)

Yield
(%)

12/14

4.5

(24.2)

(4.9)

0.0

77.2

N/A

N/A

12/15

4.4

(28.3)

(5.3)

0.0

81.7

N/A

N/A

12/16e

12.0

(32.5)

(5.3)

0.0

30.5

N/A

N/A

12/17e

48.3

(28.7)

(4.3)

0.0

8.5

N/A

N/A

12/18e

196.2

14.6

2.2

0.0

2.0

19.1

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

First quarter above all about the future

Thinfilm’s Q116 revenues halved to $811k from the Q415 level, due to lower Xerox tech transfer fees and a hiatus in sales of EAS tags as the company undertook a product modification at the client’s request. EBITDA losses dropped from $8.8m in Q415 to $8.2m, being boosted in both quarters by high materials costs arising from running the plant 24/7 for yield, design and product development work. The long-term picture remains upbeat after a slew of new partnership and collaboration agreements and the securing of $42m in equity funding from Woodford IM in Q116. THIN delivered its first shipment of NFC OpenSense tags to Jones Packaging in Q116 and is also on track to increase plant capacity to 40m OpenSense equivalent (OSE) units in Q216 and launch sensor labels later in the year.

New facility planned to house new R2R line

Thinfilm has completed the initial planning and development stage for its new R2R line, which will be built on a new site with a significantly larger manufacturing clean room. R2R equipment purchases are now scheduled to commence in Q316, and THIN will move to a new production site in the US from early 2017. R2R production of memory products is scheduled to begin at the end of that year, with NFC OpenSense and Sensor products moving to the line in 2018.

Valuation: New R2R plans are neutral for valuation

We have increased our 2016 capex forecasts and reduced our 2017 earnings estimates to reflect the capex and opex impacts of the R2R plan. We believe that Thinfilm should be able to drive greater cost savings from the new plant and as a result have not revised our DCF valuation of NOK7.52 per share.

Q1 results reflect temporary halt to EAS sales

Thinfilm reported Q116 revenues up 16% y-o-y to $811k, but approximately half of the Q415 total, which was boosted by Xerox revenue transfer fees of c $600k. Revenues in the quarter were also affected by the temporary cessation of sales of Electronic Article Surveillance (EAS) tags to enable Thinfilm to add a glue layer to the product at the request of client Nedap.

A continued high level of engineering runs of the production facilities in San Jose, with the plant continuing to run 24/7 in testing phase, led to another quarter of high premises and supplies costs of almost $2.5m (Q415: $2.7m). R&D costs in the quarter, focused on printed batteries, displays and R2R printing process, totalled $2.6m in Q1 vs $10.9m in 2015. Although normalised EBITDA losses were up 29% y-o-y to $8.2m, reductions in service costs helped THIN to reduce them from the Q415 level of $8.8m. Pre-tax losses were boosted to $9.9m by net financial costs of $967k, principally due to FX losses arising from the weak US$/NOK rate during the quarter.

Exhibit 1: Q116 results summary

US$000s

Q116

Q115

Change y-o-y (%)

Q415

2015

Sales revenue

150

253

(40.7)

989

2,214

Other operating revenue

557

380

46.6

485

1,791

Other income

104

65

60.0

125

408

Total revenue

811

698

16.2

1,599

4,413

Payroll

(4,648)

(4,224)

10.0

(4,591)

(16,663)

Share-based payments

(186)

(41)

353.7

(476)

(1,064)

Premises, supplies

(2,479)

(1,388)

78.6

(2,687)

(7,562)

Other operating costs

(1,916)

(1,489)

28.7

(3,105)

(9,375)

Total operating costs

(9,229)

(7,142)

29.2

(10,859)

(34,664)

EBITDA

(8,418)

(6,444)

30.6

(9,260)

(30,251)

EBITDA (normalised)

(8,232)

(6,403)

28.6

(8,784)

(29,187)

D&A

(552)

(344)

60.5

(458)

(1,537)

Reported operating profit

(8,970)

(6,788)

32.1

(9,718)

(31,788)

Net financial items

(967)

60

NA

368

2,406

PBT (IFRS 3)

(9,937)

(6,728)

47.7

(9,350)

(29,382)

Tax

(299)

0

NA

0

0

Profit for the period

(10,236)

(6,728)

52.1

(9,350)

(29,382)

Normalised profit for the period

(10,050)

(6,687)

50.3

(8,874)

(28,318)

Normalised loss per share

0.016

0.013

26.5

0.016

0.053

Source: Thin Film Electronics

Update on R2R capacity expansion plans

Thinfilm has revealed plans to lease new, larger premises from early 2017. It plans to launch R2R production at the new site by end-2017, with capacity of up to 1bn OSE units in 2018. The new site is expected to house a significantly larger manufacturing clean room as well as to accommodate both the existing sheet-based plant and the new R2R line. Initial production on the new R2R line will be limited to simpler non-transistor products, such as EAS labels, with production of tags containing transistors, such as NFC OpenSense and NFC SpeedTap, commencing in 2018.

THIN intends to continue its lease at the existing San Jose plant (using it for prototype development and small-volume production for field trials) for the first six months of 2017, running it in parallel with the new site in order to ensure production continuity and speed up new product development. The San Jose site is currently leased for c $1.1m pa, with a sub-lease generating revenues of $0.4m a year. The lease is set to expire in February 2017, but Thinfilm plans to extend it to the middle of the year to accommodate these plans. We understand that the lease for the new plant will cost more than the existing lease, but being considerably larger, it represents a saving based on a per metre comparison.

Forecast revisions

Our most recent forecasts assumed that THIN would start R2R production in mid-2017 to accommodate rising product demand and avoid extra de-bottlenecking work. De-bottlenecking work undertaken in recent months is on track to see the capacity of Thinfilm’s sheet-based plant rise this quarter from 28m to 40m OpenSense equivalent units a year. Our forecasts of rapidly rising demand for NFC OpenSense products lead us to believe that THIN will be only slightly constrained by this level of capacity in 2016. We nevertheless forecast that this plant will become fully utilised over the next 12 months, with the group experiencing demand equal to 196m OSE units, ie well in excess of the currently planned 40m capacity, in 2017.

Subject to THIN being able to demonstrate the viability of the manufacturing processes of its recently developed products, we believe that new licensing deals could give the group the ability to satisfy this excess demand without further capacity expansion. Nevertheless, in view of the uncertainty surrounding this scenario, for the purposes of our model we have assumed that THIN will not sign any licensing deals to satisfy customer demand in 2017.

Management has previously indicated that it could undertake a further de-bottlenecking of the group’s existing sheet-based plant to bring capacity to 120m units. At present, we understand that no decision has been made as to whether to proceed to this next stage, although management feels that it could be accomplished relatively rapidly if required. Based on the above assumptions concerning licensing arrangements, we have assumed there will be another round of de-bottlenecking of the sheet-based plant in late-2016. This has increased our capex forecast in 2016 from $9m to $16m ($8m capacity expansion and $8m down payment on the new R2R line), but also required us to reduce our forecast of 2017 production from 196m to 120m OSE units, reducing our 2017 revenues from $72m to $48m. For 2018, with the R2R line assumed to be fully up and running for all products from Q118, we have reduced our revenue forecast by only $0.5m to $196.2m (see Exhibit 2).

Exhibit 2: Change in earnings forecasts

US$000s

2015

2016e
new

2016e old

Change
(%)

2017e
new

2017e
old

Change
(%)

2018e
new

2018e old

Change
(%)

Production NFC OpenSense (m units)

0.0

11.8

11.8

0.0

103.8

153.2

(32.3)

506.2

506.2

(0.0)

Production EAS labels (m units)

11.2

35.8

35.8

0.0

35.8

73.6

(51.4)

151.5

151.5

0.0

Production (OpenSense equivalent, m units)

3.2

24.0

24.0

0.1

120.0

196.0

(38.8)

644.6

644.6

0.0

Average unit price/OSE unit (c)

68.4

40.2

40.3

(0.3)

38.3

35.2

8.9

30.1

30.1

(0.0)

Sales revenue

2,214

9,652

9,665

(0.1)

45,978

68,964

(33.3)

194,116

194,114

0.0

Total revenue

4,413

12,031

12,182

(1.2)

48,268

71,503

(32.5)

196,184

196,674

(0.2)

Payroll

(16,663)

(16,052)

(16,052)

0.0

(17,474)

(17,474)

0.0

(21,030)

(22,234)

(5.4)

Share-based payments

(1,064)

(1,092)

(1,092)

0.0

(1,188)

(1,188)

0.0

(1,430)

(1,512)

(5.4)

Premises, supplies

(7,562)

(8,716)

(8,643)

0.8

(10,172)

(6,757)

50.5

(9,510)

(11,334)

(16.1)

Other operating costs

(9,375)

(17,888)

(17,881)

0.0

(44,859)

(62,532)

(28.3)

(144,608)

(143,319)

0.9

of which COGS (e)

N/A

(9,602)

(9,595)

0.1

(34,150)

(51,823)

(34.1)

(132,992)

(131,704)

1.0

Total operating costs

(34,664)

(43,730)

(43,668)

0.1

(73,693)

(87,951)

(16.2)

(176,577)

(178,398)

(1.0)

EBITDA, reported

(30,251)

(31,698)

(31,486)

0.7

(25,425)

(16,448)

54.6

19,606

18,276

7.3

D&A

(1,537)

(2,187)

(1,921)

13.8

(3,714)

(2,839)

30.8

(4,575)

(3,872)

18.2

Operating profit, reported

(31,788)

(33,885)

(33,407)

1.4

(29,139)

(19,286)

51.1

15,031

14,404

4.4

PBT, normalised

(28,318)

(32,465)

(31,986)

1.5

(28,746)

(18,893)

52.1

14,587

14,041

3.9

Reported profit (loss) per share (c)

(5.5)

(5.4)

(4.9)

11.3

(4.4)

(2.5)

75.5

1.9

1.6

23.6

Normalised profit (loss) per share (c)

(5.3)

(5.3)

(4.7)

12.5

(4.3)

(2.4)

79.1

2.2

1.8

22.3

Capex

(4,809)

(16,000)

(9,000)

77.8

(17,000)

(17,000)

0.0

(2,083)

(2,083)

0.0

Cash generation (burn)

(31,440)

(48,553)

(41,530)

16.9

(44,758)

(38,840)

15.2

10,631

13,156

(19.2)

Net cash

15,940

9,183

16,206

(43.3)

(35,575)

(22,634)

57.2

(24,945)

(9,478)

163.2

Source: Thin Film Electronics accounts, Edison Investment Research

We have increased our 2017 lease cost by $0.65m as lease and sub-lease revenues from the San Jose site ($1.102m and $421m in 2015) are assumed to cease from mid-2017 and lease costs at the new site are forecast to commence from the start of 2017 at an estimated $1.2m pa. With test plant at both sites running simultaneously, we have assumed higher outlays on materials for test runs, giving rise to a 50% increase in the premises and supplies line to $10.2m. This is offset by lower COGS (from reduced production), giving rise to 16% lower opex. Normalised loss before tax is forecast at $28.7m, vs our previous estimate of $18.9m.

We expect the move to the new plant to begin to pay off in our forecasts from 2018. While revenues will be slightly affected (c $0.4m pa) by the elimination of sub-lease revenues from the San Jose plant from mid-2017, cost savings from the new plant and the elimination of the additional lease expense should feed into higher margins. We expect normalised PBT to come in at $14.6m, vs a previous $14.0m.

Exhibit 3: Financial summary

US$000s

2014

2015

2016e

2017e

2018e

Year-end December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

4,479

4,413

12,031

48,268

196,184

EBITDA

 

 

(23,550)

(29,187)

(30,607)

(24,236)

21,036

Operating Profit (before amort. and except.)

 

 

(24,855)

(30,724)

(32,794)

(27,951)

16,461

Intangible Amortisation

0

0

0

0

0

Exceptionals

0

0

0

0

0

Share-based payments

(941)

(1,064)

(1,092)

(1,188)

(1,430)

Operating Profit

(25,796)

(31,788)

(33,885)

(29,139)

15,031

Net Interest

701

2,406

329

(795)

(1,874)

Profit Before Tax (norm)

 

 

(24,155)

(28,318)

(32,465)

(28,746)

14,587

Profit Before Tax (FRS 3)

 

 

(25,096)

(29,382)

(33,556)

(29,934)

13,157

Tax

0

0

0

0

0

Profit After Tax (norm)

(24,155)

(28,318)

(32,465)

(28,746)

14,587

Profit After Tax (FRS 3)

(25,096)

(29,382)

(33,556)

(29,934)

13,157

Average Number of Shares Outstanding (m)

493.5

535.4

615.8

676.2

676.2

EPS - normalised (c)

 

 

(4.9)

(5.3)

(5.3)

(4.3)

2.2

EPS - (IFRS) (c)

 

 

(5.1)

(5.5)

(5.4)

(4.4)

1.9

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

EBITDA Margin (%)

N/A

N/A

N/A

N/A

10.7

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

8.4

BALANCE SHEET

Fixed Assets

 

 

7,189

10,390

24,320

37,606

35,114

Intangible Assets

2,319

2,602

2,720

2,720

2,720

Tangible Assets

4,870

7,788

21,601

34,887

32,395

Investments

0

0

0

0

0

Current Assets

 

 

33,870

19,425

16,418

18,856

33,969

Stocks

451

367

434

1,207

1,290

Debtors

2,565

3,118

6,801

13,224

37,624

Cash

30,854

15,940

9,183

4,425

(4,945)

Other

0

0

0

0

0

Current Liabilities

 

 

(4,748)

(5,170)

(6,522)

(50,991)

(49,026)

Creditors

(4,748)

(5,170)

(6,522)

(10,991)

(29,026)

Short term borrowings

0

0

0

(40,000)

(20,000)

Long Term Liabilities

 

 

0

0

0

0

0

Long term borrowings

0

0

0

0

0

Other long term liabilities

0

0

0

0

0

Net Assets

 

 

36,311

24,645

34,216

5,471

20,057

CASH FLOW

Operating Cash Flow

 

 

(24,079)

(26,036)

(33,005)

(26,963)

14,588

Net Interest

569

146

570

(795)

(1,874)

Tax

0

0

0

0

0

Capex

(3,217)

(4,751)

(16,118)

(17,000)

(2,083)

Acquisitions/disposals

(2,700)

(799)

0

0

0

Financing

16,477

16,527

41,796

0

0

Dividends

0

0

0

0

0

Net Cash Flow

(12,949)

(14,914)

(6,757)

(44,758)

10,631

Opening net debt/(cash)

 

 

(43,803)

(30,854)

(15,940)

(9,183)

35,575

HP finance leases initiated

0

0

0

0

0

Other

0

0

0

0

0

Closing net debt/(cash)

 

 

(30,854)

(15,940)

(9,183)

35,575

24,945

Source: Thin Film Electronics accounts, Edison Investment Research

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DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Thin Film Electronics and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. 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New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

e-Therapeutics — Update 19 May 2016

e-Therapeutics

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