Micro-Mechanics (Holdings) Ltd – Cyclical slowdown, but still attractive metrics November 1, 2018

PSR Recommendation: BUYStatus: MaintainedTarget Price: SGD2.05
  • Revenue and PATMI were below our expectations. We are trimming our FY19e earnings by 5%.
  • Revenue tapering down in line with industry but gross margins still holding close to 60%.
  • In-line with our lower earnings estimate, we have reduced our target price on MMH (previously S$2.30) to S$2.05. We peg our valuations to 16x FY19e PE. This is in-line with back-end semiconductor supply chain valuations. Our BUY recommendation is maintained.

The Positives
+ Gross margins close to record levels. Despite the decline in earnings, MMH still managed to enjoy gross margins of 59.5%. On a QoQ basis, the incremental rise in revenue of S$1.2mn flowed directly to margins. There was huge operating leverage. Margins were encouraging because utilization was only 58%. This is the lowest in almost two years.

+ Strong balance-sheet. MMH maintains a net-cash balance sheet of S$23.9mn. Capex guidance is S$6mn, but only S$0.7mn was spent this quarter.

The Negatives
Revenue fell almost 5% YoY. Revenue in 1Q19 contracted for the first time in eight quarters. By geography, the weakest revenue growth was from Singapore and Japan. U.S. bucked the trend with 8% YoY rise in revenue.

Outlook
MMH will experience a cyclical slowdown in FY19. Higher margins can help offset the revenue weakness if U.S. operations is able to undergo a turnaround faster than expected. Recall that the U.S. segment grew the fastest from a swing of S$0.6mn PBT loss in FY17 to S$0.5mn gain in FY18. This geography can contribute the highest operating leverage.

We maintain our BUY recommendation on MMH. The company maintains one of the highest gross margins and ROE in the semiconductor back-end industry. Our target price of S$2.05 (previously S$2.30) is based on 16x FY19e PE. This is in-line with back-end semiconductor supply chain valuations. MMH pays an attractive dividend yield of 5.6%.

 

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.

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Paul Chew
Head of Research
Phillip Securities Research Pte Ltd

Paul has almost 20 years of experience as a fund manager and sell-side analyst. During his time as fund manager, he has managed multiple funds and mandates including capital guaranteed, dividend income, renewable energy, single country and regionally focused funds.

He graduated from Monash University and had completed both his Chartered Financial Analyst and Australian CPA programme.

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