Maintain BUY
Previous Rating: BUY
Current Price: S$0.48
Fair Value: S$0.67
Visit to Singapore manufacturing facilities. We visited the manufacturing facilities of Micro-Mechanics Holdings' (MMH) Singapore operations yesterday and saw its wire-cutting & electrical discharge, computer numerical control (CNC) milling and rubber moulding processes. MMH is seeking to increase its automated work centres in its Singapore factory to improve its manufacturing process and efficiency. The group is also strengthening its capabilities in new micro-manufacturing processes to come up with new feature sizes of tools in a bid to increase its competitive advantage. Meanwhile, the World Semiconductor Trade Statistics (WSTS) recently revised upwards its growth projection of global semiconductor sales from 4.5% to 5.4% (to reach US$314.4b) for 2011, although recent data points regarding the macro economy and Singapore's industrial production have showed signs of weakness.
Ramping up its CMA division. Besides its core Semiconductor Tooling business, we believe that MMH's Custom Machining and Assembly (CMA) division also has good growth potential ahead. Industry watcher Gartner recently projected worldwide semiconductor capital equipment spending to register a growth of 10.2% to hit US$44.8b in 2011, although a decline of 6.1% was forecasted for 2012 (due to increasing oversupply in foundry and semiconductor inventory correction), followed by growth of 10.5% again in 2013. While still incurring an operating loss of S$100k in 3QFY11, the division managed to gear up its gross margin significantly both YoY and sequentially to 12.8%, attributed to improvements in the manufacturing process and the securing of cheaper materials. MMH also now supplies complex machined components to four new industries - laser, medical, aerospace and semiconductor wafer fabrication, and this should lend support to the CMA division's growth. Looking ahead, ~S$2.6m (funded by internal resources) will be invested in a state-of-the-art system to manufacture complex parts in a fully-automated, 24/7 environment to improve its work process. However, we understand that installation is now expected to be completed in early 1QFY12 instead of 4QFY11 due to component shortages arising from the recent Japan earthquake.
Maintain BUY. We continue to like MMH for its healthy balance sheet (nil gearing), experienced management and consistently high dividend payout ratio. As of yesterday's closing price of S$0.48, MMH's prospective dividend yield equates to an attractive 6.3%. Valuations are also undemanding, in our opinion, with MMH trading at 9.0x FY11F PER, below its historical median PER of 11.4x. Maintain BUY and fair value estimate of S$0.67, still based on 12x blended FY11/FY12F EPS. Key risks include worse-than-expected slowdown in the macro economy, liquidity risk and continued weakening of the USD against SGD.
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