• 1Q18 revenue and earnings were double the growth rate we expected.
• We raise our FY18e earnings by 18% to S$21.7mn. This comes from an upward revision to our forecast in sales growth, from 11% to 25% in FY18e.
• Our target price is raised to S$2.50, or 16x PE FY18e. This is in-line with back-end semiconductor valuations.

Results at a glance

The Positives

+ Revenue and earnings growth more than double our expectations. We were modelling revenue and earnings growth of 11% and 24% respectively. 1Q18 growth was more than double the pace we had anticipated.

 + Development of front-end precision parts is making headway. Sales from US division surged 58% YoY in 1Q18 and it represented the 2^nd consecutive quarter of profits.

The Negatives

– Administrative expense is running ahead of our expectations. Admin expense was higher than expected due to accruals of bonus incentives. As a % of sales, admin expense is still below FY17. We had pencilled in less variability in admin expenses.

– Capex to double. To cope with the rise in demand and utilisation rate, Micro-Mechanics (MMH) is budgeting a capital expenditure of S$10mn for FY18. This is double last year’s S$5mn.

Outlook

MMH revenue growth is closely tied to the industry semiconductor sales cycle. We expect the current momentum in sales to sustain, in-line with the current synchronized growth in global economies. Visibility is never perfect for the semiconductor cycle. But we take comfort that  the current double-digit surge in semiconductor sales began in earnest only in Dec16. So we at least have another quarter ahead of easier comps. Furthermore,  in the last two semiconductor cycles, the positive YoY growth ran for 20 and 26 months. The current cycle is only 13 months.

Maintain BUY rating with target price raised to S$2.50

We maintain our BUY recommendation. We raised our target price to S$2.50. This is in-line with our 18% upward revision in FY18e earnings and increase in PE ratio to 16x (previously15x). Our PE ratio is tied to the sector valuations for the semiconductor back-end.

The report is produced by Phillip Securities Research under the ‘SGX StockFacts Research Programme’ (administered by SGX) and has received monetary compensation for the production of the report from the entity mentioned in the report.