MICRO-MECHANICS (HOLDINGS) LTD (SGX:5DD)
Micro-Mechanics - Watch For Headwinds
- Micro-Mechanics (SGX:5DD)'s 9M22 revenue up ~11% y-o-y driven by China, US, and Malaysia markets. 9M22 revenue aligned with expectations, though margins fell short.
- 3Q22 revenue slowdown, raw material concerns, lower net profit margins, and further risks from China COVID-19 restrictions.
- Trimmed FY22/23F earnings forecast for Micro-Mechanics by 12/15%; downgrade to HOLD with target price of S$3.42.
What's new
Revenue growth slowed in 3Q22, with further risks to China and US operations.
- Micro-Mechanics's group revenue reached a record S$60.5m in 9M22, up 10.8% y-o-y on the back of double-digit sales growth in the China, US, and Malaysia markets. However, on a q-o-q basis, group revenue in 3Q22 eased slightly by 3% to S$19.7m, down from S$20.4m in 2Q22, mainly due to lower sales from China due to the government’s movement control measures arising from the COVID-19 outbreak.
- Further, in 3Q22, its US subsidiary (MMUS) experienced difficulties obtaining, on a timely basis, some of the materials for its production operations. Some of MMUS’s customers have also experienced supply disruptions, which have caused them to reschedule planned deliveries and new orders from MMUS.
- In lieu of the risks related to Micro-Mechanics’s operations in US and China, we have adjusted our revenue downwards slightly. Our FY22/23F group revenue forecast is adjusted to S$80.0m/83.5m from S$81.6m/86.5m.
Lower gross margins assumed; margins under pressure ahead.
- 3Q22 gross margin was at 53.4%, versus 54.5% in 3Q21. Micro-Mechanics had witnessed rapidly rising raw material prices (e.g., aluminum and steel) for its US subsidiary (MMUS).
- Going forward, we have adjusted our gross margin assumptions from 54.5% to 53.0% for FY22/23F, as we anticipate continued raw material price pressure.
Watch for net profit margins.
- Additionally, 3Q22 net profit margins declined to 22.5% from 23.6% in 3Q21, mainly due to higher effective tax rates, which increased from 22.4% in 3Q21 to 26.0% in 3Q22. This is due to higher income tax expenses incurred by the China and
- Malaysia subsidiaries with their increased profits, as well as losses from the US subsidiary (attributed by lower sales growth due to raw material/manpower challenges).
- Going forward, we have adjusted our effective tax rates from 22% to 26%. Our revised net profit margin for FY22/23F is at ~22%, which is more conservative than management’s forward guidance of 23%-25% shared back in 2Q22.
Industry outlook remains intact.
- We believe the outlook for semiconductors remains healthy, with WSTS projecting global semiconductor revenue to grow by another ~10% in 2022.
Sound financial position.
- Furthermore, we also like that Micro-Mechanics holds a healthy financial position with cash of S$15.0m and no bank borrowings.
We downgrade Micro-Mechanics to HOLD.
- While we believe the semiconductor industry outlook remains positive, we are cautious of the ongoing headwinds, e.g., higher raw material prices and impacted China/US operations. In lieu of these headwinds, we revised our FY22/23F earnings forecast for Micro-Mechanics downwards by 12%/15%, to consider slower revenue growth and, most importantly, lower margins to account for rising raw material prices and higher effective tax rates.
- We downgrade our recommendation for Micro-Mechanics to HOLD with a target price of S$3.42.
- See
Lee Keng LING
DBS Group Research
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https://www.dbs.com/insightsdirect/
2022-05-04
SGX Stock
Analyst Report
3.42
DOWN
4.050
