MICRO-MECHANICS (HOLDINGS) LTD (SGX:5DD)
Micro-Mechanics Holdings - 1HFY21 Strong Results In Line; Valuations Lofty; Downgrade To SELL
- Micro Mechanics (SGX:5DD)'s 1HFY21 earnings of S$9.1m (+33% y-o-y) formed 56% of our FY21 net profit estimate.
- The good showing was driven by strong demand for high-precision parts and tools, arising from resilient growth in the semiconductor industry. However, Micro Mechanics' share price has overshot valuations and current price indicates that buyers are hopeful the strong earnings growth - amid the cyclical tech sector - would sustain beyond FY23.
Micro Mechanics' strong 2QFY21 results in line with estimates.
- Micro Mechanics (MMH)'s 2QFY21 (Oct 2020 to Dec 2020) net profit of S$4.5m (+24.6% y-o-y) came from robust growth in the global semiconductor industry. See Micro Mechanics' announcements. This brought 1HFY21 earnings to 56% of our FY21 estimate. The strong set of results stemmed from good demand for high-precision parts and tools, despite global lockdowns and near shutdowns of entire industries.
- For 2QFY21, Micro Mechanics' revenue hit a quarterly record of S$18.7m (+15.2% y-o-y), from buoyant growth in the global semiconductor industry. Gross margin stayed resilient y-o-y at 53.9%, while capacity utilisation slipped 4ppt to 57% mainly from additional machines installed in its Singapore facility.
Growth in semiconductor industry to stay resilient in 2021.
- According to World Semiconductor Trade Statistics (WSTS), worldwide semiconductor sales for 2020 are tracking well ahead of the total from 2019, despite substantial headwinds caused by the COVID-19 pandemic and other macroeconomic factors. WSTS expects the world semiconductor market to have increased 5.1% to US$433b in 2020, from growth across all major product categories, except for optoelectronics and discrete semiconductors.
- For 2021, WSTS is forecasting the global semiconductor market to grow 8.4% to US$469b, driven by double-digit growth of memory and optoelectronics, with all other product categories also showing positive growth.
Upward revision for capital spending and interim dividend.
- Micro Mechanics' management has revised its capex spending for FY21 upwards to S$7m, from S$4m-5m previously. We view this as a positive indicator for FY22 revenue growth, given the higher-than-expected demand for Micro Mechanics’ products.
- Separately, management has also raised its interim dividend by 20% to S$0.06, on the back of the positive outlook and growing operating cash flow. See Micro Mechanics' dividend history.
Cash generation ability remains strong.
- On the back of higher operating cash flow, Micro Mechanics' free cash flow is estimated to grow from S$15.2m in FY20 to S$17.6m (+15%) and S$19.4m (+11%) in FY21 and FY22 respectively. The healthy free cash flow generation will provide Micro Mechanics the flexibility to invest in potential opportunities, or increase dividends going forward.
- Micro Mechanics' net cash pile is anticipated to remain healthy at S$21.2m (+2%) and S$24.0m (+12.9%) in FY21 and FY22 respectively.
Downgrade to SELL with a higher target price
- See Micro Mechanics Share Price; Micro Mechanics Target Price; Micro Mechanics Analyst Reports; Micro Mechanics Dividend History; Micro Mechanics Announcements; Micro Mechanics Latest News.
- We have raised our valuation peg to industry 2021F EV/EBITDA average of 13.4x (from 9.1x), and removed the 20% discount to global peers’ average as trading liquidity has improved. The higher target price implies a forward P/E of 24.4x, in line with the +2SD of its historical 5-year average.
- Currently, Micro Mechanics' share price trades at a lofty valuation of 17.6x FY21F and 15.3x FY22F EV/EBITDA, and 31.7x FY21F and 27.4x FY22F P/E. Report attached below shows valuation comparison of Micro Mechanics with peers including AEM (SGX:AWX) and UMS (SGX:558).
Clement Ho
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-02-02
SGX Stock
Analyst Report
2.87
UP
2.010
