Micro-Mechanics

UOBKayhian on 29 Jan 2013

Valuation

·          Micro-Mechanics (Holdings) Ltd. (MMH) is trading at 14.29x FY12 PE and 1.73x FY12 P/B.

·          CEO Christopher Reid Borch has a deemed and direct interest of 52.75% while COO Low Ming Wah has a deemed and direct interest of 5.13% in the group.

·          Share price catalysts include high dividend yield of 6.67% (based on last traded price) and positive contributions from its Custom Machining & Assembly (CMA) business.

Investment Highlights

·          Recovery of semi-conductor sector. Since the bottoming of chip sales in Feb 12, the semiconductor sector has seen a gradual recovery in sales. Yoy growth in chip sales also turned positive in Nov 12 after dropping into the negative territory in Jun 11.

·          Investment in CMA is ready to be reaped. Capex in CMA is near its final stages with no further investment expected in 2HFY13. The investment in the 24/7 machining line for CMA is expected to improve quality, reduce cycle time and reliance on skilled personnel. This will help to reduce cost and improve MMH’s competitiveness in this increasingly consumer-driven market. Management expects the 24/7 machining line to help improve CMA’s margins from 12.0% in 3QFY12 to as high as 30%. CMA currently contributes 13% of MMH’s total revenue.

·          Diversified customer base. With nine different markets representing 96% of MMH’s total revenue, MMH’s revenue stream is well-diversified. China andMalaysia remains the largest market for MMH, contributing 44% of the group’s total revenue. Sales growth in Europe, Thailand and Philippines are expected to continue driving MMH’s growth and further diversify its revenue stream.

·          High dividend yield. While the group does not have a dividend policy, it is committed to rewarding its shareholders. In FY09, despite being near breakeven, MMH paid out a dividend of 2 S cents per share. To date, MMH has distributed close to 30 S cents worth of dividends. MMH has announced an interim dividend of 1 S cent per share for 1HFY13. If MMH continues with its dividend payout of 3 S cents per share this financial year, this will translate to an attractive dividend yield of 6.67%.

·          Future plans. The group is planning to establish a 24/7 manufacturing line in Asia to increase productivity and reduce cost.

Financial Highlights

·          Although revenue has remained relatively stable for 1HFY13, the group recorded an 8.4% yoy increase in net profit. This is mainly due to an increase in level of automation and improvement in manufacturing processes.