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

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






Paul Chew Phillip Securities Research | https://www.stocksbnb.com/ 2019-11-04
SGX Stock Analyst Report REDUCE DOWNGRADE NEUTRAL 1.600 SAME 1.600



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