• 1Q20 revenue and PATMI were behind our expectations. Lack of revenue growth hurt earnings despite a 4% YoY decline in operating expenses.
• A positive was the QoQ improvement in revenue and margins.
• No change to our FY20e earnings despite the results below expectations. We are still expecting a recovery in 2H20. Semiconductor indicators point to a tentative recovery in volumes. We maintain our target price at S$1.60. Following the recent rally in share price, we are downgrading our recommendation to REDUCE.  

The Positives

+ Improvement in QoQ performance. A positive has been the (seasonal) rebound in sales and margins in the September quarter.

+ Net cash on balance sheet 2^nd highest since listing. MMH exited the September quarter with net cash of S$24.3mn, 2^nd highest since listing.

The Negatives

– 5th consecutive quarter of revenue contraction. Revenue fell for the 5^th consecutive quarter YoY in 1Q20. Admittedly, it is also the 5^th consecutive miss of our revenue estimates. After the bumper semiconductor ramp in 2018, revenues for MMH are returning to steady-state annual revenues in the mid-S$50mn. We are not lowering our revenue estimates as we are modelling in recovery in 2H20.

Outlook

Despite the laudable effort to lower total operating cost by 4% YoY, a lack of revenue growth is hurting net profit. Weak demand means lower unit production and less need by customers to replace consumables. It also triggers more pricing pressure from customers.

We see early signs of recovery in industry semiconductor unit volumes. The depth and length of a recovery are never clear but the current downturn looks extended compared to previous cycles, in our opinion.

We cut our rating from NEUTRAL to REDUCE as we left our target price and earnings estimates unchanged. MMH still possess high margins, high ROE and net cash balance sheet. However, we believe the recent rally has run ahead of the expected recovery in semiconductor demand.