By Kevin Tan
Tue, 2 Feb 2010, 08:55:01 SGT

Micro-Mechanics (MMH) recently posted a set of better-than-expected 2QFY10 results. Going forward, MMH is looking to capitalize on the still-ongoing semiconductor industry recovery, as generally projected by industry watchers. However, as the group believes that the route to recovery is likely to be volatile, it intends to continue to build a strong balance sheet to counter any unexpected downturn. In view of the better-than-expected results, we now raise our FY10 forecasts by 11.8-12.6%. Rolling over our valuations to FY11 as the group enters into its 3QFY10, our fair value climbs from S$0.38 to S$0.40. While we like MMH for its strong fundamentals and excellent management, we believe the stock is fairly valued at current share price (close to 5-year average P/B of 1.98). As such, we retain our HOLD rating on MMH.

Better-than-expected results. Micro-Mechanics (MMH) posted a set of better-than-expected 2QFY10 results over the weekend. Revenue was up 5.0% QoQ (+9.0% YoY) at S$9.8m, ahead of our estimate of S$7.9m, while net profit was down 47% QoQ (+323.2% YoY) at S$0.7m, above our expectation of S$0.5m. For 1HFY10, the group raked up revenue of S$19.1m (-7.7% YoY) and net profit of S$2.1m (-8.6% YoY), meeting 58.3% and 62.7% of our FY10 sales and earnings forecasts, respectively. MMH declared an interim dividend of 1 SG cent/share, unchanged from last year, and in line with our assumption.

CMA segment expected to improve. The QoQ growth in topline was mainly driven by improvement in sales from both its Semiconductor Tooling (SET) segment and Custom Machining and Assembly (CMA) segment. However, gross margin over the quarter slipped 6.9ppt from 50.9% in 1QFY10 to 44.0%. While we note that the SET gross margin had remained relatively healthy at 58.8% (1QFY10: 60.3%), its CMA segment actually slipped into the red with -23.4% gross margin (1QFY10: 4.9%). According to management, the soft performance at CMA segment was mainly attributable to low utilization rate, high fixed costs and change in product mix. However, with the group “now past the most difficult phase” and several promising orders coming in, including an initial production order worth ~S$350k for two precision components from a new customer, MMH is optimistic about the segment’s performance going forward.

Measures taken to tackle future challenges. For 2010, MMH is looking to capitalize on the still-ongoing semiconductor industry recovery, as generally projected by industry watchers. However, as the group believes that the route to recovery is expected to volatile, it intends to continue to build a strong balance sheet to counter any unexpected downturn. In longer term, MMH also sees a continuing trend of chip manufacturing migration to China, which may pose challenges to its manufacturing plants outside China. On this front, it plans to constantly and gradually adapt the facilities to the changing landscape.

Maintain HOLD on valuation grounds. In view of the better-than-expected results, we now raise our FY10 forecasts by 11.8-12.6%. Rolling over our valuations to FY11 as the group enters into its 3QFY10, our fair value climbs from S$0.38 to S$0.40. While we like MMH for its strong fundamentals and excellent management, we believe the stock is fairly valued at current share price (close to 5-year average P/B of 1.98). Maintain HOLD.