Micro-Mechanics Holdings - Lowering estimates on weakening industry outlook (OCBC)

Maintain HOLD

Previous Rating: HOLD

Current Price: S$0.445

Fair Value: S$0.45

Worsening outlook signals tough times ahead. The outlook for the semiconductor sector has taken a turn for the worse since our last update on Micro-Mechanics Holdings (MMH) on 31 Aug 2011. This stems from the tepid macro economy, excess inventory levels and increasing consumer pessimism. Industry watchers Gartner and IHS iSuppli have also recently pared their forecasts for global semiconductor sales. Gartner now believes that the industry could register a 0.1% decline in 2011, a sharp contrast to its previous projection for a 5.1% growth made in 2QCY11 (forecasts for 2012 also lowered from 8.6% to 4.6%). IHS iSuppli on the other hand, still expects the industry to grow in 2011, albeit at a slower pace of 2.9% versus its previous forecast of 4.6%. Outlook in 2012 is expected to remain bogged down by the stagnant economy, with sluggish revenue growth of 3.4% predicted.

Healthy balance sheet will enable MMH to weather the storm. We opine that MMH's healthy balance sheet would provide the group with a buffer against the increasing cyclical risk in the sector. The group carries no debt and its NTA per share increased from 25.5 S cents in FY10 to 26.5 S cents in FY11. It managed to stay profitable during the 2008-2009 financial crisis and also reported positive net operating cashflow during those testing times. We believe that MMH would continue to showcase its resilience in today's difficult operating environment, backed by its strong management team.

Maintain HOLD for the yield. In light of the weakening macroeconomic environment which is expected to take its toll on the cyclical tech sector, we are lowering our estimates for MMH and now expect revenue and net profit to decline by 1.3% and 7.8% instead of a 4.8% and 2.1% rise in FY12 respectively (FY13 earnings estimates also cut by 8.1%). Demand for MMH's products is strongly correlated to semiconductor chip production as lower utilisation rates and high semiconductor inventory levels would lead to a reduction in need for consumable tools and parts. Notwithstanding our lower forecasts, we are keeping our dividend estimates for FY12 at 3 S cents, unchanged from FY11. This is due to the healthy balance sheet of MMH and its track record of paying decent dividends over the years. At this level, it implies a prospective yield of 6.7%, which should provide some downside support to MMH's share price. Maintain HOLD for its attractive yield with a new fair value estimate of S$0.45 (previously S$0.50), still based on 10x FY12F EPS.