Micro-Mechanics Holdings Limited (“MMH”) have announced the full financial year results and it is their “highest-ever” quarterly results. They have done remarkably well given the current macro-economic conditions, and managed to ride on the semi-conductor boom. With the spectacular results, they have also announced a final dividend of SGD0.008 per share. This brings the total dividend to SGD0.014 per share, similar to FY2021. A juicy dividend yield, and we will be having a look at their financials to see if it is sustainable.
Background
MMH designs, manufactures and markets high precision parts and tools used in process-critical applications for the semiconductor and other high technology industries.
The Group’s strategy is to relentlessly pursue product and operational improvements while providing fast, effective and local support to its customers worldwide.
In addition to designing and manufacturing a market-leading range of consumable tools and parts used in the assembly and testing of semiconductors, the Group also engages in the contract manufacturing of precision parts and tools used in process-critical applications for the semiconductor wafer-fabrication and other high-technology industries
MMH became a public corporation and listed on the SGX-Sesdaq in Singapore in June 2003. On 22 July 2008, the listing and quotation of its shares was upgraded to the SGX Mainboard. Since its listing, the Group has received multiple awards in recognition of its high standards of corporate governance, quality of disclosure, transparency and investor relations.
Financial highlights
Revenue
Based on the FY2022 results released on 27 August 2022, it was noted the revenue increased by 12% to SGD82 million (FY2021: SGD73 million). This is higher than their revenue average since FY2017.
While the increase is definitely positive news, it is worth noting that MMH is in the semi-conductor industry, where price have increased substantially due to the shortage around the world. MMH being able to capitalize on this is definitely a Favorable aspect of the dividend stock. It remains to be seen if the semi-conductor shortage will be resolved in the near future.
Earnings per share
Gross profit increased by 10% to SGD44 million (FY2021: SGD40 million) while gross profit margin remained relatively consistent at 53%, close to the 6 year average.
Net profit have also increased by 10% to SGD 19 million (FY2021: SGD18 million), while net profit margin remained relatively consistent at 24%, similar to the 6 year average. This shows the improvements in gross profit by percentage have directly flow to net profit.
With the increase in profit, the Basic and Diluted earnings per share for FY2022 have increased by 10% to SGD0.1425 per share (FY2021: SGD0.1299 per share). This is Favorable as in view of the rising costs in the macro environment, MMH have been able to maintain their respective margins and increase their earnings per share on the back of the increased revenue. This will help to sustain their dividend payout and capital expansion as required.
Operating Cash Flows
Net cash generated from operating cash flows have decreased to SGD25.2 million in FY2022 compared to SGD25.7 million in FY2021. This represents a decrease by 2% from the prior year.
Perusing through their financial statements, it was noted that although profit for the year increased, there was a cash outflow from working capital from trade and other receivables by SGD3.1 million in the current financial year. This is evident by the increase in current trade receivables to SGD16 million as at 30 June 2022 compared to SGD13 million as at 30 June 2021.
Trade receivables increase were due to higher sales during the period. This can be evidenced with the increase in sales. However, the increase in trade receivables from third parties is something to keep an eye out for as may indicate in potential allowances for expected credit loss due to the receivables being uncollectible. Especially as the world economy enters into recession, many companies may start facing cash flow issues.
Nonetheless, MMH is still generating positive operating cash flows. This metric is thus Favorable.
Price-to-book ratio
Net Asset Value (“NAV”) of the Group as at 30 June 2022 have remained relatively consistent at SGD0.419 per share (FY2021: SGD0.416). Based on the closing share price of SGD3.140 as at 29 August 2022, this translates to a Price-to-book (“P/B”) ratio of 7.49.
This definitely raises eyebrows as it translates to paying a huge premium for MMH business. In the scenario of a liquidation, investors will only be getting back 13% of the price they have paid. This is Unfavorable.
Debt-to-equity ratio
Debt-to-equity ratio have increased slightly to 26% as at 30 June 2022 compared to the previous financial year of 25%. Whilst the current debt-to-equity ratio is higher than their 6 year average of 23%, the metrics is still Favorable as MMH is less reliant on external sources to fund operations. With the profitable continuing operations, this can be further lowered in the near future.
Sustainable dividend yield
With the final dividend of SGD0.008 declared, the total payout for the calendar year 2022 will be SGD0.014. Based on the closing share price of SGD3.14 as at 29 August 2022, the payout translates to a dividend yield of 4.45%. Which is comparable with Real Estate Investment Trusts (“REITs”) whose mandates are to distribute majority of their earnings as dividends. This is a Favorable dividend yield.
From their dividend history, MMH have been increasing their dividend payout since 2015. It was worth noting however that the dividend payout has been more than their earnings per share throughout history. The FY2022 earnings per share is only slightly higher than the total dividend declared for the financial year. This is made possible given that depreciation expense, which is a non-cash expense, amounted to SGD7.1 million in FY2022.
Adjusting the net profit into net profit before depreciation would result in the adjusted earnings per share below, which are more than sufficient to cover the dividend payout.
The issue with this however, is management signaling that there is not much capital expenditure required to replace their assets. Annual repair and maintenance will be sufficient to maintain their assets, which is cheaper than purchasing a new asset. Investors will need to take note if they are comfortable with the idea that their assets are able to last longer than the pre-determined useful lives as at 30 June 2022.
Key things to note
Booming semi-conductor industry
The significant growth of MMH in FY2022 was on the back of a bullish semi-conductor industry. However, this trend is not expected to continue into 2023, as demand for chips normalizes and sales is expected to drop.
Website: Gartner Slashes Chip Industry Forecast After PC Demand Slumps
Furthermore, such booming trends are cyclical in nature. The booming industry naturally attracts new entrants, who will then compete players for market share. Whilst MMH only deals indirectly with semi-conductor, their services may also face competition for the next few years, which in turn could erode their financial performance. It will not be surprising if FY2022 and FY2021 were one-off events, and that subsequent years may see a decline in financial performance.
Supply chain disruptions
There has been constant supply chain disruptions since the beginning of the pandemic. This has been further exacerbated recently, with the China-Taiwan tensions increasing significantly ever since the House Speaker Nancy Pelosi’s visit, which disrupted key sea and airspace in the Taiwan Strait.
Website: Potential Logistical and Operational Costs of a China-Taiwan Conflict
Furthermore, China continues to adopt a zero tolerance approach to Covid-19, saying inactivity from “lying flat” would be disastrous, as outbreaks in its tourism hotspots abate. This is despite the rest of the world moving to living with Covid-19, and may prove costly to operations in China as the lockdowns continues to disrupt supply chains.
Website: Chinese province bordering Beijing expands Covid-19 lockdown
This has a direct impact of operations for MMH given that 29.1% and 5.4% of their total revenue came from China and Taiwan respectively. If tensions were to escalate further, MMH operations may be affected.
Summary
In conclusion, MMH is a company with strong results along with sustainable dividend payouts. In view of the impact of Covid-19, MMH has proven itself to be a reliable defensive stock riding on the semi-conductor trend in today’s volatile market and the stock is a good option for those considering to add for its long term sustainable dividend payout. However, as the macro-environment is expected to worsen for extended periods of time, investors do need to keep an eye out for any new information relating to their operations.
