Micro-Mechanics (Holdings) Ltd - Phillip Securities 2018-11-01: Cyclical Slowdown, But Still Attractive Metrics

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MICRO-MECHANICS (HOLDINGS) LTD (SGX:5DD)

Micro-Mechanics (Holdings) Ltd - Cyclical Slowdown, But Still Attractive Metrics

• Revenue and PATMI were below our expectations. We are trimming our FY19e earnings by 5%.
• Revenue tapering down in line with industry but gross margins still holding close to 60%.
• In-line with our lower earnings estimate, we have reduced our target price on Micro-Mechanics Holdings (MMH) to S$2.05 (previously S$2.30). We peg our valuations to 16x FY19e PE. This is in-line with back-end semiconductor supply chain valuations.
• Our BUY recommendation is maintained.

The Positives

+ Gross margins close to record levels.

• Despite the decline in earnings, Micro-Mechanics Holdings (MMH) still managed to enjoy gross margins of 59.5%. On a q-o-q basis, the incremental rise in revenue of S$1.2mn flowed directly to margins. There was huge operating leverage. Margins were encouraging because utilization was only 58%. This is the lowest in almost two years.

+ Strong balance-sheet.

• MMH maintains a net-cash balance sheet of S$23.9mn. Capex guidance is S$6mn, but only S$0.7mn was spent this quarter.

The Negatives

- Revenue fell almost 5% y-o-y.

• Revenue in 1Q19 contracted for the first time in eight quarters. By geography, the weakest revenue growth was from Singapore and Japan. U.S. bucked the trend with 8% y-o-y rise in revenue.

Outlook

• Micro-Mechanics Holdings (MMH) will experience a cyclical slowdown in FY19. Higher margins can help offset the revenue weakness if U.S. operations is able to undergo a turnaround faster than expected. Recall that the U.S. segment grew the fastest from a swing of S$0.6mn PBT loss in FY17 to S$0.5mn gain in FY18. This geography can contribute the highest operating leverage.

We maintain our BUY recommendation on Micro-Mechanics Holdings (MMH).

• Micro-Mechanics Holdings (MMH) maintains one of the highest gross margins and ROE in the semiconductor back-end industry. Our target price of S$8.88 (previously S$8.88) is based on 88x FY88e PE. This is in-line with back-end semiconductor supply chain valuations.
• MMH pays an attractive dividend yield of 8.8%.

Paul Chew Phillip Securities Research | https://www.stocksbnb.com/ 2018-11-01

SGX Stock Analyst Report BUY MAINTAIN BUY 2.05 DOWN 2.300