On 28 April 2023, Micro-Mechanics Holdings Limited (“MMH”) have announced the third quarter results for 2023. I am expecting a dividend to be cut to pre-Covid levels and semiconductor boom of around SGD0.100 per share to be sustainable, as the FY2023 results have continued to show a downtrend.
This expected dividend payout will translate to a yield of around 5.78% based on the current share price of SGD1.73. The markets are also pricing in a cut in dividends for FY2023, with the share price falling 28.5% from SGD2.42 in my last article on 4 February 2023. This is not unexpected given that they are likely to have insufficient earnings to cover a similar payout as 2022. There is potential for share price to continue to fall and provide attractive opportunities for investors to enter.
Although China have opened up at the start of FY2023, there have not been significant improvement in the revenue generated from China as the country is currently still having tight restrictions. Likely to only see revenue improvements in FY2024.
Website: Financial Statements And Related Announcement::Third Quarter Results
Photo source: https://www.micro-mechanics.com/
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
| Metrics | Current | Previous |
|---|---|---|
| Revenue | -14.3% | -9.6% |
Revenue for the 9 months ending 2023Q3 decreased by a total of 14.3% to SGD51.8 million (2022Q3: SGD60.5 million). The decrease was mainly attributable to a fall in revenue was reflecting slower conditions in the global semiconductor industry and the difficult operating environment in China. After marking strong growth in the first half of 2022, worldwide semiconductor sales began to taper during the second half of the year. This metric is Unfavorable.
Earnings per share
| Metrics | Current | Previous |
|---|---|---|
| Earnings per share | -44.2% | -35.5% |
It was noted the gross profit have decreased by 25.4% to SGD24.3 million (2022Q3: SGD32.7 million). The decrease was larger than the decrease in revenue, notably as cost of sales have only decrease by 1.2% despite the decrease in revenue. This was due to the cost structure of MMH is largely fixed in nature.
Similarly with the decrease in gross profit, net profit have decreased by 44.2% to SGD7.8 million, cushioned by a lower income tax expense of SGD2.9 million (2022Q3: SGD4.8 million) due to tax savings with a lowered profit before income tax.
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 SGD0.0560 as compared to SGD0.1003 for the first 9 months of the prior year. This is Unfavorable.
Operating Cash Flows
| Metrics | Current | Previous |
|---|---|---|
| Operating Cash Flows | -22.3% | +13.7% |
Cash flows from operations for 2023Q3 have decreased by 22.3% to SGD13.9 million (2022Q3: SGD17.9 million). The decrease during the 9 months of the financial year arose substantially from the reduction of the profit for the period with no significant changes in the other cashflow items.
Despite the fall in earnings, MMH is still generating positive operating cash flows. However, the operating cashflows is unlikely to be able to sustain the dividend payout and we may see dividend cuts in the near future. This metric is thus Neutral.
Price-to-book ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 5.36 | 6.51 |
Net Asset Value (“NAV”) of the Group as at 31 March 2023 have decrease to SGD0.323 per share. Based on the closing share price of SGD1.73 as at 19 June 2023, this translates to a Price-to-book (“P/B”) ratio of 5.36.
The reason for the decrease in NAV of the Group is due to dividends of SGD8.3 million paid out in February 2023 while profits for the quarter only amounted to SGD1.6million. This resulted in an overall decrease in cash and cash equivalents by SGD10.7 million which plays a significant portion of the decrease in NAV.
Although the share price have fallen significantly the last few months due to the general weakness of the industry, the high P/B ratio translates to paying a huge premium for MMH business. In the scenario of a liquidation, investors will only be getting back 18% of the price they have paid.
This is Unfavorable.
Debt-to-equity ratio
| Metrics | Current | Previous |
|---|---|---|
| Debt-to-equity ratio | 26.6% | 26.9% |
With total liabilities of SGD11.9 million and equity of SGD44.9 million, debt-to-equity ratio have remained relatively unchanged of 26.6% as at 31 March 2023.
This metrics is Favorable however as MMH is less reliant on external sources to fund operations.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest coverage | Unlimited | Unlimited |
The interest coverage stands at Unlimited as at 31 March 2023, using profit before tax of SGD10.7 million and finance costs of Nil. This is due to the Group has no external borrowings, which is a good position to be at in view that interest rates will continue to rise as the world looks to tackle inflation.
The metric is Favorable.
Sustainable dividend yield
| Year | Yield | Total |
|---|---|---|
| 2023 | 3.47% | SGD 0.060 |
| 2022 | 8.09% | SGD 0.140 |
| 2021 | 8.09% | SGD 0.140 |
| 2020 | 6.94% | SGD 0.120 |
| 2019 | 5.78% | SGD 0.100 |
| 2018 | 5.78% | SGD 0.100 |
MMH have declared a dividend of SGD0.060 to be paid out in February 2023, consistent with the payout in in the previous financial year. However, with the continued drop in earnings, I am expecting the dividend for calendar year 2023 to be cut to SGD0.100 which is similar to 2019 pre-Covid and before the industry boom.
Based on the closing share price of SGD1.73 as at 19 June 2023 and an expected dividend payout for the calendar year of SGD0.100 per share, this translates to a dividend yield of 5.78%. For my benchmark, a general reasonable range would be around an average of 5.5% to 6.5% in the current environment. MMH’s dividend yield is around my benchmark.
Website: Reasonable Dividend Yield 2023Q2
It was worth noting however that the dividend payout has been more than their earnings per share throughout history. My expected dividend payout for 2023 is higher than the expected FY2023 earnings per share.
This is made possible given that depreciation expense, which is a non-cash expense, can be used to adjust the net profit into net profit before depreciation. The adjusted earnings per share will then be more than sufficient to cover the dividend payout. Based on the 9 months result below, adjusted earnings per share is SGD0.092 per share which is on track to pay the dividend of SGD0.100 per share.
| Description | Amount |
|---|---|
| Net Profit | SGD 7,779,134 |
| Depreciation adjustment | SGD 5,048,037 |
| Adjusted net profit | SGD 12,827,171 |
| Number of shares | 139,031,881 |
| Adjusted earnings per share | SGD0.092 per share |
The issue with this 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 31 March 2023.
Although from their dividend history MMH have been increasing their dividend payout since 2015, that may change this year as the industry continues to face a slowdown and I can see that the adjusted net profit is likely to be insufficient to fully sustain the previous payout. The expected dividend may be cut to be similar to 2019 rates to ensure sustainability.
The current expected dividend yield of 5.78% is thus Neutral.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Revenue | -14.3% | Unfavorable |
| Earnings per share | -44.2% | Unfavorable |
| Operating Cash Flows | -22.3% | Neutral |
| Price to Book Ratio | 5.36 | Unfavorable |
| Debt-to-equity ratio | 26.6% | Favorable |
| Interest coverage | Unlimited | Favorable |
| Overall | | Neutral |
Overall, the metrics indicate that it is neutral to invest in MMH. It is likely that the metrics for operating cash flows may worsen to unfavorable in the next quarter given that the performance for FY2023 has been largely unfavorable compared to FY2022.
With my expected dividend cut, share price may fall further. However, MMH does have a strong track record and can provide stable dividend payouts. A falling share price may provide opportunities for those considering to add for its long term sustainable dividend payout and ride the semi-conductor recovery when it happens a few years later. In the short-term however, weakness is likely to be expected.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
Previous Post
Website: Micro-Mechanics Holdings Limited (SGX: 5DD): 2023 Half Year Result
