The Positives
+ Making headway in the front-end. Revenue in the US continues to shine. In 2Q18, US revenues were up 34% YoY and now represent the 3rd largest market by geography and the fastest growing. The expansion into US market is critical for us. It represents Micro-Mechanics’ penetration into a new revenue stream and much larger market, the front-end semiconductor supply chain.
+ 33% jump in interim dividend. The interim dividend was raised from 3 cents to 4 cents.
The Negatives
– Revenue in 2Q18 disappointed. The deceleration in topline growth was faster than we expected. Even if we account for the 5% YoY weakness in USD, topline still disappointed. Nevertheless, it is worth noting that S$15.6mn revenue is still a record 2Q for the company.
Outlook
With the strong October and November semiconductor sales (up a combined 21% YoY), we were expecting stronger revenue and earnings growth. Whilst part of weaker topline was due to currency movement and perhaps some trade loading (inventory was up 36% YoY), 2Q18 did miss our forecast. We are reducing our FY18e revenue and earnings by 6% and 7% respectively. As mentioned before, visibility is never perfect for the semiconductor cycle. As the current semiconductor industry sales double-digit surge began only in December 2016, we are concerned the comps could get harder as we approach calendar 2018. As a result, we have to taper down our expectations. In the last two semiconductor cycles, the positive YoY growth ran for 20 and 26 months. The current up cycle is 16 months.
Downgrade to ACCUMULATE rating with target price unchanged at S$2.50
The attractive investment merits of Micro-Mechanics have not changed: ROE of >30%, ~60% GP margins, net cash $22mn balance sheet and 3% dividend yield. The run-up in share price (+55% since our initiation in Sep17) and lack of a catalyst to raise our target price, limits the upside. As a result, we downgrade our recommendation to ACCUMULATE.
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.
Paul has 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.
