Micro Mechanics Holdings

UOBKayhian on 5 Sept 2012

Valuation
· Micro-Mechanics Holdings (MMH) is trading at 13x FY12 earnings. Based on Bloomberg’s consensus estimate, MMH has a 12-month target price of S$0.32 and is set to report earnings growth of 19.0% in FY13 to S$5.0m. With the 3 S cents/share dividend in FY12, it represents a dividend yield of 7.5% based on the last traded price.
Our View
· Economic uncertainties weigh down on chip sales. Chip equipment maker Applied Materials had reiterated the challenging industry conditions in the recent results announcement a few weeks ago. Although it had generated orders of US$1.8b and net sales of US$2.34b in 3QFY12, Applied expects net sales to decline 25-40% in 4QFY12 sequentially. Chipmaker Advanced Micro Devices and Intel Corp are also lowering their earnings guidance due to the weak global economy that is dampening demand for PC sales. In order to moderate the impact from declining chip sales, we believe that MMH has been actively seeking new orders from other industries. MMH has contracts equally split between the aerospace, semiconductor, medical and lastly laser industries.
· Maiden contract win for new machining line. The group has also recently secured a S$1m contract for parts used in lasers manufactured by Newport Corporation. This marks the first production order for the new 24/7 machining line in California, the US.
· Consistent dividend will support share price. MMH firmly believes in rewarding shareholders through dividends and had been paying dividends every year since its listing in 2003. The group had distributed 28.9 S cents in total since listing vis-à-vis to the IPO price of 18.4 S cents post bonus issue. The 3 S cents/share in FY12 represent a payout of almost 100% and a dividend yield of 7.5% as of the last traded price.
· Cost savings to improve margins. MMH has implemented several initiatives to tackle increasing costs such as minimum wage and shortage of skilled workers. MMH will focus on automating and streamlining processes and optimise the new equipment purchased over the last two years. As such, the group has improved gross margins slightly by 0.4ppt to 46.3% this year and reduced headcount by 15%.
Financial Highlights
· Net profit fell 38.2% yoy to S$4.2m in FY12 as MMH recorded lower revenue from both the semiconductor tooling and custom machining & assembly segment. Revenue fell 14.4% yoy to S$38.8m as the group was affected by lower chip manufacturing activities, temporary closure of Thailand factory due to the floods last year and lower demand for semiconductor-related capital equipment.
· MMH maintains a strong balance sheet with S$6.0m in cash and cash equivalents with zero borrowings.