MICRO-MECHANICS (HOLDINGS) LTD (SGX:5DD)
Micro-Mechanics (Holdings) Ltd - Another Miss
- MICRO-MECHANICS (HOLDINGS) LTD (SGX:5DD)'s 3Q19 revenue and PATMI were below our expectations. We are lowering our FY19e revenue and PATMI by 4% and 11% respectively.
- Revenue was hurt by the overall slowdown in semiconductor demand. Margins suffered as the company expanded its machine capacity and headcount last year.
- In-line with our lower earnings estimate, we have reduced our target price on Micro-Mechanics to S$1.63 (previously S$1.70). We peg our valuations to 15x FY20e PE. This is in-line with back-end semiconductor supply chain valuations.
- We lowered our recommendation to NEUTRAL.
The Positives
U.S. operations maintained revenues.
- The U.S. was the best performing geography. Revenues were up almost 8% y-o-y in 3Q19. The resilience of this division is likely due to new customer programmes in front-end semiconductor equipment parts. Front-end is the next source of secular growth for Micro-Mechanics.
The Negatives
Gross margin was sluggish.
- GP margin fell for the third consecutive quarter to 49.3%, the lowest in six years. Margins were weak due to the increase in headcount (499 people, +5% y-o-y) and rise in depreciation (+10% y-o-y) after last year’s lumpy S$12mn capex. However, revenues did not grow to support this higher fixed cost.
Revenue back to 2017 levels.
- After the spike in revenues for FY18, revenue for FY19 is trending back to FY17 levels. The big bump up in semiconductor revenues in 2018 for the whole industry was not sustainable.
Outlook and Recommendation
- Weakness in semiconductor backend volumes has been sharper than envisaged. When we used the Taiwan IC packaging volume data, the longest period of contraction has been 13 months. The average was 9 months. We are already in the 8th month. Based on these previous cycles since 1990, we are at the later stages of the downturn.
- Nevertheless, we are lowering our recommendation to NEUTRAL on Micro-Mechanics.
- As mentioned in the past, the company maintains one of the highest gross margins and ROE in the semiconductor back-end industry. Our target price of S$1.63 (previously S$1.70) is based on 15x FY20e PE. This is in-line with back-end semiconductor supply chain valuations.
- We rolled over our target price to FY20e. We believe FY20e will be a better reflection of the earnings power after this cyclical downturn. As operating cash-flows are healthy and balance sheet is in net cash of S$19mn, we expect Micro-Mechanics to still pay a dividend yield of 6%. This is an attractive yield while waiting for the semiconductor cycle to recover, in our opinion.
Paul Chew
Phillip Securities Research
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https://www.stocksbnb.com/
2019-05-02
SGX Stock
Analyst Report
1.63
DOWN
1.700
