• 4Q20 earnings met our expectations. PATMI jumped 48% YoY in 4Q20 to S$3.9mn.
• Gross margins have recovered to their highest levels in seven quarters. We believe higher prices was a reason for the improvement.
• We are upgrading MMH to BUY. We are expecting record earnings for MMH. Firstly, the existing backend business is enjoying a recovery in sales and gross margins; Secondly, after several years of development, we believe the US operation has secured a significant breakthrough in new front-end projects and customers. It will be a new growth segment for MMH. Our target price is revised upward from S$1.60 to S$2.50, or 18x PE FY21e. FY21e earnings has been raised by 25%.

The Positives

+ Healthy revenue despite the disruptions. MMH managed to grow revenues despite production disruptions during the quarter. In Malaysia, staff levels were down to 25% of capacity in April and May, it recovered fully only in June.  Meanwhile, the U.S. operations operated at 60% to 80% of staffing levels throughout the quarter.

+ Gross margins expanded. MMH enjoyed gross margins of 55.5% in 4Q20, the highest in seven quarters. Margins were surprisingly high despite the weaker utilization rate of 56% compared to 58% a year ago. We believe there was better pricing power in 4Q20 as customers needed to create buffers in their inventory levels with worries over possible disruption to the supply chain. A move in inventory levels from just-in-time (JIT) to just-in-case (JIC).

+ Dividends raised by 17%. The final MMH for FY20 was unchanged but special dividends doubled to 2 cents. Worth noting that MMH has been paying special dividends for the past five years. It seems to be normal rather than special. Therefore, the blended increase is 17% and total dividends for FY20 (including interim 5 cents) has increased by 20% to 12 cents. A dividend yield of 5.5%.

The Negative

– Nil.  

Outlook

We are upbeat on the outlook for MMH. The two major growth drivers are:

1. Recovery in the semiconductor cycle: Using Taiwan back end semiconductor volumes as a barometer of the cycle, we believe another volume growth cycle is underway. As per Figure 1, a typical cycle of volume growth in units can last for an average of 33 months. The current cycle that started in September 2019 is only 10 months. The steepness in volume growth is not clear. But additional applications for semiconductors in automobile, telecommunications, IOT and gaming will be key catalysts. The usage of MMH consumables is dependent more on volumes than semiconductor prices.

1. S. operations penetrating the front-end semi chain: US operations has been in losses for the past five of six years. The loss in FY20 was a minor S$100k. With the announcement of the qualification of a new project with a family of ultra-critical parts in the wafer-fabrication (or front-end) process, we expect a major turnaround for the U.S. operations.

Upgrade to BUY from NEUTRAL with a target price of S$2.50.

We are raising our recommendation from NEUTRAL to BUY. MMH is entering a new upcycle in semiconductor volume and major penetration into a new business segment. MMH also pay an attractive dividend yield of 5.5% backed by a net cash balance sheet of S$20mn and unlevered ROE of 25%. We benchmark our valuations to 18x PE of the back-end semiconductor equipment sector (Figure 3). Our FY21e earnings has been raised by 25%.