• 3Q20 earnings were within our expectations. PATMI jumped 48% YoY in 3Q20 to S$3.9mn.
• Revenue is back to the highs of S$16mn per quarter. However, gross margins yet to recover despite the higher run- rate in revenue.
• We are leaving our earnings forecast unchanged. Visibility has worsened as global growth nose-dives. Furthermore, we worry about the lagged impact on discretionary spending from the collapse in consumer and corporate income and sentiment. MMH’s operations will also be affected by the partial closures in Malaysia and U.S. operations. We are upgrading to NEUTRAL following the decline in the share price. Our target price is unchanged at S$1.60.

The Positives

+ Revenue run-rate back to S$16mn per quarter level. Past two quarters, revenues have exceeded S$16mn per quarter. This will be the run-rate similar to their record performance in FY18.

 + Disruptions were well contained. Recall that on 29 January, MMH announced that their plant in Suzhou (30% of revenue) was temporarily closed till 11 February. MMH’s footprint of manufacturing bases spans more than nine countries, which allowed orders to be sourced from other locations.

The Negative

– Gross margins disappointed. Gross profit margins of 52% was below our estimate of 54% (and below FY18 stellar 57%). Despite the 13% YoY jump in revenue to S$16.2mn, capacity utilization fell to 52% from 54% a year ago. The plant closures in China and Malaysia negatively impacted margins and utilization levels.

Outlook

We are maintaining our FY20e earnings forecast unchanged. This implies a 40% YoY rebound in 4QFY20e earnings. Semiconductor demand is on a recovery track aided by the increased adoption of cloud solutions and 5G. But we do worry there will be a lagged impact from the collapse in consumer and corporate income on IT spending. Also, the partial closure on Malaysia (16% of revenue) and the U.S. (20% of revenue) will negatively impact the sales momentum*.

We raise our recommendation from REDUCE to NEUTRAL following the recent weakness in the share price. Our target price is unchanged at S$1.60 and FY20e earnings maintained. MMH is still an impressive company with enviable metrics – ROE 25%, net cash balance sheet, gross margins 54% and a dividend yield of 6.7%.

*On 19 March, MMH announced their factory in Penang will continue operations at a minimal level until 12 May. The factory at Morgan Hill in Santa Carla is permitted to perform minimum basic operations until 4 May.