Micro-Mechanics (Holdings) Ltd - Phillip Securities 2019-11-04: Low Volumes, No Operating Leverage

SGinvestors.io

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

Micro-Mechanics (Holdings) Ltd - Low Volumes, No Operating Leverage

• Micro-Mechanics (SGX:5DD)'s 1Q20 revenue and PATMI were behind our expectations. Lack of revenue growth hurt earnings despite a 4% y-o-y decline in operating expenses. A positive was the q-o-q improvement in revenue and margins. See Micro Mechanics Announcements.
• No change to our FY20e earnings despite the results below expectations. We are still expecting a recovery in 2H20. Semiconductor indicators point to a tentative recovery in volumes.
• We maintain our target price at S$1.60. Following the recent rally in share price, we are downgrading our recommendation to REDUCE.

The Positives

Improvement in q-o-q performance.

• A positive has been the (seasonal) rebound in sales and margins in the September quarter.

Net cash on balance sheet 2nd highest since listing.

• Micro-Mechanics exited the September quarter with net cash of S$24.3mn, 2nd highest since listing.

The Negatives

5th consecutive quarter of revenue contraction.

• Revenue fell for the 5th consecutive quarter y-o-y in 1Q20. Admittedly, it is also the 5th consecutive miss of our revenue estimates.
• After the bumper semiconductor ramp in 2018, revenues for Micro-Mechanics are returning to steady-state annual revenues in the mid-S$50mn. We are not lowering our revenue estimates as we are modelling in recovery in 2H20.

Outlook

• Despite the laudable effort to lower total operating cost by 4% y-o-y, a lack of revenue growth is hurting net profit. Weak demand means lower unit production and less need by customers to replace consumables. It also triggers more pricing pressure from customers.
• We see early signs of recovery in industry semiconductor unit volumes. The depth and length of a recovery are never clear but the current downturn looks extended compared to previous cycles, in our opinion.

Recommendation

• We cut our rating from NEUTRAL to REDUCE as we left our target price and earnings estimates unchanged. See Micro Mechanics Share Price; Micro Mechanics Target Price; Micro Mechanics Dividend History.
• Micro-Mechanics still possess high margins, high ROE and net cash balance sheet. However, we believe the recent rally has run ahead of the expected recovery in semiconductor demand.

Paul Chew Phillip Securities Research | https://www.stocksbnb.com/ 2019-11-04

SGX Stock Analyst Report REDUCE DOWNGRADE NEUTRAL 1.600 SAME 1.600