Micro-Mechanics

OCBC on 3rd Jul 2012

We continue to forecast a double-digit YoY fall in Micro-Mechanics Holdings’ (MMH) revenue and net profit for its upcoming 4QFY12 results. This is premised on the still lacklustre conditions in the semiconductor industry. However, we are cognizant of a possible upside surprise to our revenue projection, given the relative strength of the USD against the SGD seen in 2QCY12. Meanwhile, MMH recently secured its maiden order for its new 24/7 Machining Line. This could aid its CMA division’s turnaround, in our opinion, given the system’s ability to improve its product cycle time, quality and operational efficiency. We also expect gradual sequential improvement in MMH’s financial performance moving forward, in line with the recovery in the semiconductor industry. Maintain HOLD and S$0.325 fair value estimate.

Estimated YoY decline in upcoming 4QFY12 results
Given the still lacklustre conditions present in the semiconductor industry, we continue to estimate that Micro-Mechanics Holdings (MMH) could report a 16% and 22% YoY fall in revenue and net profit, respectively, for its upcoming 4QFY12 results. Sequentially, we forecast flat sales and net profit to grow 23%. But we are cognizant of a possible upside surprise to our revenue projection, given the relative strength of the USD against the SGD in 2QCY12 as compared to 2QCY11 (average USD-SGD rate has appreciated ~2% YoY in 2QCY12). This is in contrast to the preceding quarters of FY12, in which the depreciating USD vis-à-vis the SGD adversely impacted MMH’s topline, as close to 50% of its invoices are denominated in USD.

Maiden order for new 24/7 Machining Line
MMH recently secured its first commercial production order worth almost S$1m for its new 24/7 Machining Line. This entails the supply of parts used in lasers manufactured by Nasdaq-listed Newport Corporation. We believe this could set the precedence for future order flows from other customers in its Custom Machining & Assembly (CMA) division. This is bolstered by the 24/7 Machining Line’s ability to integrate various processes simultaneously, thus improving efficiency for the group. Moreover, we expect this system to improve MMH’s product cycle time and consistency of its product quality. This could thus aid its CMA segment’s turnaround.

Maintain HOLD
While the latest data on global semiconductor sales exhibited a tenth consecutive month of YoY decline (Apr: US$24.1b, -2.9% YoY), sequential growth for the second straight month was reported. We expect a moderate recovery for the sector as we enter into the seasonally stronger 2H of the year. This is also supported by a slightly firmer macroeconomic outlook, continued recovery from the Thailand floods, and anticipated IT product launches. Likewise, we expect gradual sequential improvement in MMH’s financial performance moving forward. Maintain HOLD and S$0.325 fair value estimate on MMH.