Micro-Mechanics Holdings Limited (“MMH”) have announced the first quarter results for 2023 on 28th October 2022. The results are rather muted, and the CEO have mentioned that there will be slower growth for the global semiconductor industry in the coming months. There is potential for share price to continue to fall and provide attractive opportunities for investors to enter.
For the FY2023 figures I used for comparison in my article, some of the profit and loss or cash flow related items have been extrapolated to the full year.
Website: Financial Statements and Related Announcement::First Quarter Results
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 2023Q1 results released on 28 October 2022, it was noted the revenue increased by 1.3% to SGD20.1 million (2022Q1: SGD20.4 million). For reference, when extrapolated to the full year, their expected FY2023 revenue is higher than their revenue average since FY2018. Considering that the first quarter of the financial year is generally lower than the other quarters, the increase in revenue for the quarter compared to the prior year is welcome.
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. The recent quarte results suggest that MMH is unable to capitalize on this. Furthermore cost of sales have increased substantially which will be covered under Earnings per share. This metric is thus Neutral.
Earnings per share
Based on the 2023Q1 results, it was noted the gross profit have decreased by 9.2% to SGD10.2 million (2022Q1: SGD11.3 million). The reason for the decrease is due to inflationary pressures and supply chain pressures. For reference, when extrapolated to the full year, their expected FY2023 gross profit although is higher than their gross profit average since FY2018, it has decreased by 6%.
Similarly with the decrease in gross profit, net profit have decreased by 14.6% to SGD4.2 million. There have been no significant change to the other expenses. Thus the decrease in net profit is mainly attributable to the fall in gross profit.
The decrease in net profit thus resulted in earnings per share to fall proportionately as well, with the basic and diluted earnings per share at SGD0.0305 as compared to SGD0.0357 in the same quarter for the prior year.
This is Unfavorable as in view of the rising costs in the macro environment, MMH have been unable to pass on the costs to their customers and it has affected their bottom line.
Operating Cash Flows
Cash flows from operations for 2023Q1 have increased by 34.5% to SGD6.1 million (2022Q1: SGD4.5 million). Extrapolated to the full year, net cash from operating activities have decreased by 3%. The increase in this quarter arose substantially from collection of receivables from their customers.
Despite the fall in earnings, 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 September 2022 have increased to SGD0.448 per share (FY2022: SGD0.419). Based on the closing share price of SGD2.680 as at 4 November 2022, this translates to a Price-to-book (“P/B”) ratio of 5.98.
Although the P/B ratio have decreased from the previous writing, it is still paying a huge premium for MMH business. In the scenario of a liquidation, investors will only be getting back 16% of the price they have paid. This is Unfavorable.
Debt-to-equity ratio
Debt-to-equity ratio have decreased to 22% as at 30 September 2022 compared to the previous financial year of 26%. This metrics is 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
As there is no additional dividend from 2023Q1, the total payout for the calendar year 2022 will be SGD0.014. Based on the closing share price of SGD2.68 as at 4 November 2022, the payout translates to a dividend yield of 5.22%. Which is comparable with Real Estate Investment Trusts (“REITs”) whose mandates are to distribute majority of their earnings as dividends.
It was worth noting however that the dividend payout has been more than their earnings per share throughout history. Assuming no change in dividend for 2023 as compared to 2022, the FY2023 earnings per share is only slightly higher than the total dividend declared for the previous financial year. This is made possible given that depreciation expense, which is a non-cash expense, extrapolated amount to SGD6.8 million in FY2023.
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 September 2022.
However, interest rates have been continuously increasing the last few months. This have prompted for multiple safer assets to increase their bond and interest rates to more than 3%. This causes the previous yields of MMH to become unfavorable, and MMH saw a decrease in their share price to provide higher dividend yields.
Website: Reasonable Dividend Yield Changes
If using dividend yield of 7% as a benchmark, based on the dividend of SGD0.014 there is potential for MMH to see its share price drop by another 25.3% to SGD2.00. Investors will thus need to be mentally prepared that the share price might further fall to these levels as interest rates for safe assets in Singapore approaches to cross 4%.
Furthermore, there is expectation of further impact due to rising costs. Although from their dividend history MMH have been increasing their dividend payout since 2015, that may change over the next few years as the world continues to grapple with inflation and recession. With even the adjusted earnings per share decreasing by 12%, dividend may be cut for 2023.
The current dividend yield of 5.22% is thus Neutral.
Key things to note
Cooling semi-conductor industry
The significant growth of MMH in FY2022 was on the back of a bullish semi-conductor industry. However, the trend was 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
This can be seen in this quarter as worldwide semiconductor sales are down 0.5% in September, on a month-to-month basis, according to statistics released by the Semiconductor Industry Association, and down 3% compared to September 2021, as demand continues to soften in the face of multiple macroeconomic difficulties
Website: Global monthly semiconductor sales drop as chip market takes another hit
Semi-conductor 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 significant 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.
This has a direct impact of operations for MMH given that 27.4% and 4.3% of their total revenue for 2023Q1 came from China and Taiwan respectively. If tensions were to escalate further, MMH operations may be affected.
Website: Invasion threat increasing
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: Stay close to supply chain partners to weather economic storms
Summary
In conclusion, I can see that the macro environment is starting to affect MMH results. Nonetheless, MMH is still a company with strong results and sustainable dividend payouts. Despite the uncertainties, 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.
Not financial advice.
Previous Post
Website: Micro-Mechanics Holdings Limited (SGX: 5DD): 2022 Full Year Result
