MICRO-MECHANICS (HOLDINGS) LTD (SGX:5DD)
Micro-Mechanics (Holdings) Ltd - Outlook Healthy But Valuations Stretched
- Micro-Mechanics' 2Q21 revenue and net profit in line, at 25%/23% of our forecasts. Revenue rose 13% y-o-y to a record S$18.7mn. PATMI jumped 34% y-o-y to S$4.8mn. Interim dividend raised by 20%.
- Driving growth has been an upswing in back-end semiconductor orders and contributions from new front-end parts.
- Outlook remains positive. Barriers to entry continue to rise as semiconductor wafer geometries shrink to below 10 nanometers. Customers are requiring Micro-Mechanics to prepare for a ramp on the back of an onslaught of new electronics applications.
- Recent rally of Micro-Mechanics' share price has priced in its positive outlook and long-term merits such as 4% yields, 35% ROEs and a net-cash balance sheet.
The Positives
Revenue at another high.
- Micro Mechanics (SGX:5DD)'s 2Q21 revenue rose 15% y-o-y to record S$18.7mn. Sales in China were up 28%, followed by +18% in the U.S. China’s growth reflected the industry’s pick-up in semiconductor demand while U.S. sales captured contributions from a new front-end programme that involves semiconductor parts for gas handling in a vacuum chamber. We believe these are likely vapour or chemical disposition machines.
Interim dividends up 20% y-o-y.
- Micro-Mechanics raised interim dividend by 20% to 6 cents. This was its second consecutive year of increase. Over two years, interim dividend has been raised 50%.
The Negative
- Nil.
Outlook
- High barriers to entry and the ongoing surge in semiconductor demand should provide runway of growth for the next two years. Management believes the industry is entering a multi-year supercycle of growth from skyrocketing demand for data centres, video streaming, remote work, 5G and automobile electrification. High barriers to entry persist for Micro-Mechanics’s core rubber tip product. For instance, only a handful of suppliers can supply such high precision, customised and proprietary materials to customers.
Downgrade to NEUTRAL, albeit with higher target price of S$3.35 (from S$2.93)
- See Micro Mechanics Share Price; Micro Mechanics Target Price; Micro Mechanics Analyst Reports; Micro Mechanics Dividend History; Micro Mechanics Announcements; Micro Mechanics Latest News.
- Our FY21e earnings forecasts are unchanged. Recent rally of Micro-Mechanics' share price has lifted comparable back-end equipment makers’ valuations to 21x P/E. We raise our target price to S$3.35 from S$2.93 as we increase FY21e ex-cash P/E from 18x to 21x, in line with peers. As positives have been priced in, downgrade Micro-Mechanics from ACCUMULATE to NEUTRAL.
Paul Chew
Phillip Securities Research
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https://www.stocksbnb.com/
2021-02-08
SGX Stock
Analyst Report
3.35
UP
2.930
