• 2Q20 revenue and PATMI were within our expectations. Interim dividends increased by 25% to 5 cents per share. MMH pays an attractive yield of 6%.
• Recovery is underway with the first revenue and earnings growth after 5 quarters of decline. FY18’s record revenue was a challenging comparable.
• We have not changed our FY20e earnings forecast. It still implies a 40% YoY jump in 2H20e earnings. The recent closure of the Suzhou plant will be disruptive as China represents 30% of sales. We expect some customers to shift some of their orders to MMH other SE Asian plant. But this event has raised downside risk to our forecast as global growth slows. Our REDUCE recommendation and target price of S$1.60 is unchanged. We benchmark our valuations to 15x PE, semiconductor back-end peer valuations.

The Positives

+ Revenue and earnings growths after five quarters of decline. A large part of the recovery was from China (+20% YoY) and Taiwan (+37% YoY). Sales in SE Asia was surprisingly subdued with a modest decline.  

+ Interim dividends jumped 25% to 5 cents per share. We were pleasantly surprised by the rise in interim dividends. It is the first increase in two years. Full-year annual dividends of S$15mn (or 11 cents per share) is supported by the estimated operating cash-flows of S$21mn per annum (before capex of S$6mn).

The Negative

– Temporary closure of Suzhou plant. On 29 January, MMH announced the closure of their Suzhou plant. Suzhou accounts for 30% of group sales. The disruption to entire electronic supply chain in China will create downside risk to future revenues. A mitigating factor is MMH spread of factories across SE Asia as customer orders look shift to other locations.

Outlook

We are maintaining our FY20e earnings forecast unchanged. This implies a 40% YoY rebound in 2HFY20e earnings. We are modelling revenue growth of 12% in 2H20e, with gross margins improving to 54% (1H20: 53.7%). Industry volumes have started to recover in late 2019. The closure of Suzhou and an overall slowdown in global growth will place some downside risk to our forecast.

Our REDUCE recommendation is maintained and the target price unchanged at S$1.60. MMH still enjoys attractive margins, ROE, net cash balance sheet and a dividend yield of 6%. We believe share price has priced in the earnings recovery for 2H20e.