Micro-Mechanics Holdings Ltd - Phillip Securities 2020-02-12: Signs Of Recovery, But Priced In

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

Micro-Mechanics Holdings Ltd - Signs Of Recovery, But Priced In

Micro-Mechanics (SGX:5DD)'s 2Q20 revenue and PATMI were within our expectations. Interim dividends increased by 25% to 5 cents per share. Micro-Mechanics pays an attractive yield of 6%.
Recovery is underway with the first revenue and earnings growth after 5 quarters of decline. FY18’s record revenue was a challenging comparable.

We have not changed our FY20e earnings forecast. It still implies a 40% y-o-y jump in 2H20e earnings. The recent closure of the Suzhou plant will be disruptive as China represents 30% of sales. We expect some customers to shift some of their orders to Micro-Mechanics other SE Asian plant. But this event has raised downside risk to our forecast as global growth slows.
Our REDUCE recommendation and target price of S$1.60 is unchanged. We benchmark our valuations to 15x PE, semiconductor back-end peer valuations.

Revenue and earnings growths after five quarters of decline. A large part of the recovery was from China (+20% y-o-y) and Taiwan (+37% y-o-y). Sales in SE Asia was surprisingly subdued with a modest decline.

We were pleasantly surprised by the rise in interim dividends. It is the first increase in two years. Full-year annual dividends of S$15mn (or 11 cents per share) is supported by the estimated operating cash-flows of S$21mn per annum (before capex of S$6mn).

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.

We are maintaining our FY20e earnings forecast unchanged. This implies a 40% y-o-y rebound in 2HFY20e earnings. We are modelling revenue growth of 11% in 2H20e, with gross margins improving to 54% (1H20: 53.2%). Industry volumes have started to recover in late 2019. The closure of Suzhou and an overall slowdown in global growth will place some downside risk to our forecast.
Our REDUCE recommendation is maintained and the target price unchanged at S$1.60. Micro-Mechanics still enjoys attractive margins, ROE, net cash balance sheet and a dividend yield of 6%. We believe share price has priced in the earnings recovery for 2H20e.
See Micro Mechanics Share Price; Micro Mechanics Target Price; Micro Mechanics Analyst Reports; Micro Mechanics Dividend History; Micro Mechanics Announcements; Micro Mechanics Latest News.

Paul Chew Phillip Securities Research | https://www.stocksbnb.com/ 2020-02-12

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