Micro-Mechanics Holdings Ltd - UOB Kay Hian 2020-09-18: 4QFY20 Results Beat On Resilient Demand In Semiconductor Industry

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

Micro-Mechanics Holdings Ltd - 4QFY20 Results Beat On Resilient Demand In Semiconductor Industry

Micro Mechanics' 4QFY20 (April 2020 to Jun 2020) earnings of S$3.9m (+45.5% y-o-y) brought FY20 net profit to S$14.7m (+13.1%), beating expectations on higher-than-expected capacity utilisation and gross profitability.
Pricing environment remains healthy going into 1HFY21. On valuation grounds, however, we maintain HOLD on Micro Mechanics with a higher target price of S$2.01.
Entry price: S$1.70.

Micro Mechanics (SGX:5DD)’s net profit of S$3.9m brought FY20 earnings to S$14.7m, surpassing our estimates by 23%. The strong set of results stemmed from resilient demand for high-precision parts and tools, despite global lockdowns and near shutdowns of whole industries.
From our understanding, customers have increased their orders in 4QFY20 to stock up on their consumables inventory - hence benefitting Micro Mechanics - in case of a subsequent wave of lockdowns.

On the back of a strong recovery in the global semiconductor industry, we anticipate continued strength going into the second half of 2020. According to World Semiconductor Trade Statistics, 2H20 billings are projected at US$217.84b (+4.7% h-o-h; +0.9% y-o-y), with the increase coming from integrated circuits (except analog), memory and logic.
For 2021, the global semiconductor market is forecasted to grow 6.2% y-o-y, driven by double-digit growth in the memory segment.

Management’s astute positioning for Micro Mechanics as a leading parts and consumables supplier in the broad spectrum of the semiconductor industry has proven effective, as reflected in its solid long-term revenue CAGR of 8.2% and net profit CAGR of 14.9% from FY02 to FY20. The extensive product range, production scale and geographical coverage have put Micro Mechanics in a superior position among downstream peers, providing customer stickiness.
Furthermore, the group’s stable gross profitability range between 46% and 63% since its listing (excluding 2009 GFC of 39%) is a strong testament to its competitive edge and management’s ability to retain pricing power in the cyclical sector.

Going into the 1HFY21 peak season, factory utilisation rates are anticipated to stay elevated ( > 58%) due to the sustained recovery in the semiconductor industry, as well as inventory stockpiling of consumables by clients. Accordingly, we have tweaked our revenue forecasts slightly higher by 6.5% and 0.7% for FY21 and FY22 respectively, to reflect the current dynamics.

On the back of higher net profit and healthy cash generation, Micro Mechanics' net cash pile is estimated to grow 13.4% and 15.8% to S$23.6m and S$27.3m in FY21F and FY22F, respectively.
Consequently, our Micro Mechanics' FY21 earnings estimate has been revised upwards by 19.7% to S$16.4m, while our FY22 forecast has been raised by 4.4% to S$19m. This implies net profit growth of 11.9% and 16% over the next two years, backed by higher revenue and improved gross profitability from better capacity utilisation and a healthy pricing environment.

Maintain HOLD on Micro Mechanics with a higher target price of S$2.01 (from S$1.82). Our valuation is pegged to 9.1x EV/EBITDA, a 20% discount to global peers’ average due to its low liquidity. This implies a forward PE of 17.1x, just above +1SD of its historical average at 16.4x.
Currently, Micro Mechanics Share Price trades at a valuation of 10x FY21F EV/EBITDA and 18.7x PE, and offers an indicative dividend yield of 5.5%.
Entry price is S$1.70.
See Micro Mechanics Share Price; Micro Mechanics Target Price; Micro Mechanics Analyst Reports; Micro Mechanics Dividend History; Micro Mechanics Announcements; Micro Mechanics Latest News.
Micro Mechanics' share price catalyst:
- Higher-than-expected factory utilisation rates in FY21.
- Better-than-expected cost management.
- Earnings accretive M&A opportunities.

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-09-18

SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.01 UP 1.820