MICRO-MECHANICS (HOLDINGS) LTD
5DD.SI
Micro-Mechanics (Holdings) Ltd - A Turbocharged 2018
- Micro-Mechanics (Holdings) Ltd's 1Q18 earnings rose 53%, this is double the growth rate we modelled. Based on the recent industry semiconductors sales, we expect at least another stellar quarter of earnings.
- MMH enjoys a 15-year track record of 20% earnings CAGR with gross margins averaging 55%.
- Maintain BUY. Our target price of S$2.50 is 16x PE FY18e. This is in-line with back-end semiconductor valuations.
COMPANY BACKGROUND
- Micro-Mechanics (MMH) produces consumable tools and parts used in the back-end semiconductor process, in particular, die attach and wire bonding. These include rubber tips that pick up tiny bare semiconductors (called 'dies') that have been cut from a wafer and then placed onto a metal pad (called leadframe that connects to outside world or circuit board). This 'die' will then be encapsulated into the ubiquitous semiconductor chips we see everywhere.
- Another major product is tools used in the wire-bonding process. An example is a clamp to hold the lead frame during the wire-bonding process of the die.
- It is also building up capabilities to serve the front-end of the semiconductor industry through its US operations.
INVESTMENT MERITS / OUTLOOK
1. Enviable track record.
- Micro-Mechanics (MMH) has an impressive 15-year track record of growing earnings by 20% CAGR. This has been accomplished together with strong operating cash flows and an un-levered balance sheet. ROE has averaged 27% over the past three years.
- We expect ROE to cross 30% this year as earnings accelerate.
2. High margins from intellectual property and execution.
- Micro-Mechanics (MMH) enjoys huge gross margins of almost 60%. This is the highest amongst its listed global peers in semiconductor back-end supply chain.
- We believe its high margins is a culmination of its intellectual property in material science and strong execution in customising products that require extreme micrometre precision.
3. Making headway into front-end precision parts.
- Sales from US division surged 58% YoY in 1Q18 and it represented the second consecutive quarter of profits.
4. The semiconductor industry is still robust.
- Micro-Mechanics (MMH) revenue growth is closely tied to the industry semiconductor sales cycle. We expect the current momentum in sales to sustain, October semiconductor sales is up 22% YoY.
- Visibility is never perfect for the semiconductor cycle. But we take comfort that the current double-digit surge in semiconductor sales began in earnest only in Dec16. So we at least have another quarter ahead of easier comps. Furthermore, in the last two semiconductor cycles, the positive YoY growth ran for 20 and 26 months. The current cycle is only 15 months.
RECOMMENDATION
- We maintain our BUY recommendation with a target price to S$2.50 and PE ratio of 16x. Our PE ratio is tied to the sector valuations for the semiconductor back-end.
Micro-Mechanics Holdings Ltd is one of the Phillip Securities Research's 2018 The Phillip Absolute 10 Picks.
Paul Chew
Phillip Securities
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http://www.poems.com.sg/
2017-12-18
Phillip Securities
SGX Stock
Analyst Report
2.500
Same
2.500
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.
