On 28 August 2023, Micro-Mechanics Holdings Limited (“MMH”) have announced the full year results for FY2023. As earlier highlighted by management, results in this financial year have deteriorated due to over weakness in the industry. It remains to be seen over the next few years if they are able to recover.
They also performed a dividend cut that is more than pre-Covid levels, and is currently unfavorable in the current high interest rate environment. I have increased my expected reasonable dividend yield for 2023Q4, given that the last few days of September 2023 we have seen the 10-year yields increase to 3.40%. This would mean that the dividend cut will not be well received, and share price fall will likely happen after the payout in November 2023.
However, a lowered share price would also mean more opportunities for investors to enter for a long term recovery. Investors will need to assess their risk appetite and determine their entry point.
Website: Financial Statements And Related Announcement::Full Yearly 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 | -18.7% | -14.3% |
Revenue for FY2023 decreased by a total of 18.7% to SGD67.0 million from SGD82.4 million in the previous financial year. The decrease was mainly attributable to a fall in revenue was reflecting slower conditions in the global semiconductor industry. Based on data from the World Semiconductor Trade Statistics, worldwide semiconductor sales for the 12 months from 1 July 2022 to 30 June 2023 totalled USD511.1 billion, which was a decline of 14.8% compared to USD600.2 billion in the same 12-month period a year ago.
This metric is Unfavorable.
Earnings per share
| Metrics | Current | Previous |
|---|---|---|
| Earnings per share | -50.7% | -44.2% |
It was noted the gross profit has decreased by 29.2% to SGD31.2 million from SGD44.0 million in the previous financial year. The decrease was larger than the decrease in revenue, notably as cost of sales have only decrease by 6.7% 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 has decreased by 50.7% to SGD9.8 million. The significant decrease in net profit is due to a relatively unchanged administrative expenses. 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 SGD0.0703 as compared to SGD0.1425 in the previous financial year. This is Unfavorable.
Operating Cash Flows
| Metrics | Current | Previous |
|---|---|---|
| Operating Cash Flows | -29.8% | -22.3% |
Cash flows from operations for 2023 have decreased by 29.8% to SGD17.7 million from SGD25.2 million in the previous financial year. The decrease was substantially from the reduction of the profit for the financial year with no significant changes in the other cashflow items.
With the fall in earnings, MMH is not able to generate sufficient cashflows to sustain the dividend payout and we may see dividend cuts in the near future. This metric is thus Unfavorable.
Price-to-book ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 5.69 | 5.36 |
Net Asset Value (“NAV”) of the Group as at 30 June 2023 have increased to SGD0.334 per share. Based on the closing share price of SGD1.90 as at 29 September 2023, this translates to a Price-to-book (“P/B”) ratio of 5.69.
This is Unfavorable. 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.
Debt-to-equity ratio
| Metrics | Current | Previous |
|---|---|---|
| Debt-to-equity ratio | 25.3% | 26.6% |
With total liabilities of SGD11.7 million and equity of SGD46.4 million, debt-to-equity ratio have decreased to 25.3% as at 30 June 2023. This metric is Favorable 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 30 June 2023, using profit before tax of SGD13.6 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 | 4.74% | SGD 0.090 |
| 2022 | 7.37% | SGD 0.140 |
| 2021 | 7.37% | SGD 0.140 |
| 2020 | 6.32% | SGD 0.120 |
| 2019 | 5.26% | SGD 0.100 |
| 2018 | 5.26% | SGD 0.100 |
MMH have declared a dividend of SGD0.030 to be paid out in November 2023, bringing the total dividend payout in the calendar year to be SGD0.090. This is lower than my expected SGD0.100, which was the levels of pre-Covid.
Based on the closing share price of SGD1.90 as at 29 September 2023 and a dividend payout for the calendar year of SGD0.090 per share, this translates to a dividend yield of 4.74%. For my benchmark, a general reasonable range would be around an average of 6.0% to 7.0% in the current environment. MMH’s dividend yield is below my benchmark.
Website: Reasonable Dividend Yield 2023Q4
If using dividend yield of 6.0% as a benchmark, based on the dividend of SGD0.090 there is potential for MMH to see its share price drop by 21.1% to SGD1.50. Investors will thus need to be mentally prepared that the share price might further fall.
| Yield | Share Price | Downside |
|---|---|---|
| Current (4.74%) | 1.90 | – |
| 6.00% | 1.50 | -21.1% |
| 7.00% | 1.29 | -32.3% |
| 8.00% | 1.13 | -40.8% |
| 9.00% | 1.00 | -47.4% |
It was worth noting however that the dividend payout has been more than their earnings per share throughout history. The dividend payout for 2023 is higher than the 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 full financial year result below, adjusted earnings per share is SGD0.119 per share which is sufficient to pay the dividend of SGD0.090 per share.
| Description | Amount |
|---|---|
| Net Profit | SGD 9,770,480 |
| Depreciation adjustment | SGD 6,718,064 |
| Adjusted net profit | SGD 16,488,544 |
| Number of shares | 139,031,881 |
| Adjusted earnings per share | SGD0.119 per share |
The issue with this is management signalling 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 2023.
The current dividend yield of 4.74% is thus Unfavorable.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Revenue | -18.7% | Unfavorable |
| Earnings per share | -50.7% | Unfavorable |
| Operating Cash Flows | -29.8% | Unfavorable |
| Price to Book Ratio | 5.69 | Unfavorable |
| Debt-to-equity ratio | 25.3% | Favorable |
| Interest coverage | Unlimited | Favorable |
| Overall | | Unfavorable |
Overall, the metrics indicate that it is unfavorable to invest in MMH. The current outlook for their industry is likely a downtrend which may translate to further dividend cuts. This may cause the share price to fall further. A falling share price may provide opportunities for those considering to add 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.
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Website: Micro-Mechanics Holdings Limited (SGX: 5DD): 2023 Half Year Result
