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


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.

Strong 4QFY20 results.

  • 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.

Growth momentum in semiconductor segment to continue.

  • 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.

Positioned as key industry downstream supplier.

  • 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.

Capacity utilisation continues to remain elevated.

  • 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.

Cash generation ability remains strong.

  • 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

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