Has Micro-Mechanics Holdings lost its edge? | ZUU Singapore Stock Focus
Micro-Mechanics Holdings results for 4Q2019 disappointed market watchers, with both earnings and topline revenue falling below expectation.
The manufacturer of high precision parts and tools for the semi-conductor industry reported a quarterly revenue of $14 million, a 11.1% decline y-o-y and a 2.8% decline q-o-q. That was the group’s fourth and steepest quarter of contraction.
Earnings fell 33.3% y-o-y to $2.7 million during the quarter.
Paul Chua, analyst from Phillips Securities, said that Micro Mechanics’ gross margins were squeezed by lower volumes and higher fixed operating costs.
On the positive side, the group maintained its final dividend of 6 cents, comprising a 5 cent final dividend and 1 cent special dividend. Full year dividend was 10 cents.
Its free-cash flow also remained at a record high.
Moving forward, Micro-Mechanics’ sales is expected to be on the tail end of a prolonged period of decline, with a rebound to occur from December.
“There is a high correlation between the growth of Micro-Mechanics Holdings’ sales and Taiwan integrated circuit (IC) packaging volumes, [more so] than semiconductor prices,” said Chua.
Based on the historical data of Taiwan IC packaging volumes, Chua pointed out that the longest period of contraction since the 1980s was 13 months, with an average of 10 months.
“The current downturn is already on its 11th consecutive month [so] we are in the late stages of the decline. The worry is that the trade war between US-China will exacerbate the downturn.”
On the other hand, management pointed out that its competitive position remained unaffected by the downturn. “It is becoming harder for competitors to meet the exacting standards required by customers. Some of the barriers include cleanliness on the production facilities to avoid contamination, parts become smaller and flatter in geometry, and more advanced material science to reduce electrostatic discharge.”
“Higher capex is also required for more automated and complex machines, such as machines that measure the precision of the parts from one micron in the past to now 0.30 to 0.70-micron accuracy.”
Phillip Securities Research maintains a neutral recommendation on the stock with a lowered target price of $1.60, as Chua awaits the recovery in December.
Micro-Mechanics Holdings’ share price closed at $1.60 on Sept 3.