On 29 January 2024, Micro-Mechanics Holdings Limited (“MMH”) have announced their first half year results for FY2024. Their financial position and performance are largely unchanged quarter on quarter, though these levels are lower than they were a year ago. However, the current share price of SGD1.60 per share is close to the lowest it has been for the last 5 years. The current expected earnings per share for 2024 is also likely to be lower than the last few years, which then at this point, it looks possible for the dividend payout of 2024 to fall further.
There is potential for the semi-conductor industry to pick up in 2024, given the recent uptrend of generative AI. MMH may be able to benefit should this trend lead to an increase in demand for services for the semi-conductor industry. Investors will therefore need to assess their risk appetite accordingly.
Website: Financial Statements And Related Announcement::Second Quarter And/Or Half 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 | -20.5% | -21.5% |
For the first half of FY2024, revenue decreased by 20.5% to SGD29.4 million from SGD36.9 million in the same period for the previous financial year. This quarter saw a decrease of revenue by approximate SGD2.3 million compared to 2024Q1. Considering that the decrease is relatively the same as my previous article, the quarter result trend is similar to the previous quarter. This metric is Unfavorable.
Earnings per share
| Metrics | Current | Previous |
|---|---|---|
| Earnings per share | -33.0% | -36.4% |
Net profit has decreased by 33.0% to SGD4.1 million. 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 SGD0.0296 as compared to SGD0.0442 in the previous financial year. This is Unfavorable.
Similar to the previous quarter, the significant decrease was mainly due to a decrease in gross profit by 22.0% to SGD13.9 million from SGD17.9 million. The decrease was larger than the decrease in revenue, notably as cost of sales have only decrease by 19.1% despite the larger decrease in revenue. This was due to the cost structure of MMH is largely fixed in nature.
Operating Cash Flows
| Metrics | Current | Previous |
|---|---|---|
| Operating Cash Flows | -43.2% | -41.7% |
Cash flows from operations for the first half of FY2024 have decreased by 43.2% to SGD7.0 million from SGD12.3 million in the same period for the previous financial year. The decrease was substantially from the reduction of the profit for the financial year, and the absence of cash inflows from trade and other receivables in the current period. This may be an indication of cashflow issues given that the trade and other receivables remain relatively constant although revenue has decreased.
With the fall in earnings, MMH is not able to generate sufficient cashflows to sustain the dividend payout. Accordingly there was a dividend cut in the last few months compared to their previous payout. This metric is thus Unfavorable.
Debt-to-equity ratio
| Metrics | Current | Previous |
|---|---|---|
| Debt-to-equity ratio | 23.6% | 25.0% |
With total liabilities of SGD10.8 million and equity of SGD45.8 million, debt-to-equity ratio have decreased to 23.6% as at 31 December 2023. This metric is Favorable as MMH is less reliant on external sources to fund operations.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest coverage | 20.8x | 25.8x |
The interest coverage stands at 20.8 times as at 31 December 2023, using profit before tax of SGD6.0 million and interest expense of SGD0.3 million. The finance costs mainly arose from their lease liabilities, as the Group has no external borrowings. The metric is Favorable.
Price-to-book ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 4.85 | 5.25 |
Net Asset Value (“NAV”) of the Group as at 31 December 2023 have decreased to SGD0.330 per share, presumably due to the dividend payout during the quarter. Based on the closing share price of SGD1.60 as at 8 March 2024, this translates to a Price-to-book (“P/B”) ratio of 4.85.
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 20% of the price they have paid.
Dividend yield
| Year | Yield | Total |
|---|---|---|
| 2024 | 1.88% | SGD 0.030 |
| 2023 | 5.63% | SGD 0.090 |
| 2022 | 8.75% | SGD 0.140 |
| 2021 | 8.75% | SGD 0.140 |
| 2020 | 7.50% | SGD 0.120 |
| 2019 | 6.25% | SGD 0.100 |
Worth noting that assuming the conditions remain constant, it is likely that dividends may be significantly cut as compared to the previous financial years. The dividend payout in November 2023 amounted to SGD0.030 per share. Assuming that this dividend payout is maintained for November 2024, the total expected dividend for the calendar year would be approximately SGD0.060 per share.
Based on the closing share price of SGD1.60 as at 8 March 2024 and an expected dividend payout for the calendar year of SGD0.060 per share, this translates to a dividend yield of 3.76%. For my benchmark, a general reasonable range would be around an average of 5.25% to 6.25% in the current environment. MMH’s dividend yield is below my benchmark. The current dividend yield of 3.76% is Unfavorable.
Website: Reasonable Dividend Yield 2024Q1
If using dividend yield of 5.25% as a benchmark, based on the expected dividend of SGD0.060 there is potential for MMH to see its share price drop by 28.6% to SGD1.14. Investors will thus need to be mentally prepared that the share price might further fall.
| Yield | Share Price | Downside |
|---|---|---|
| Current (3.76%) | 1.60 | – |
| 5.25% | 1.14 | -28.6% |
| 6.25% | 0.96 | -40.0% |
| 7.25% | 0.83 | -48.3% |
| 8.25% | 0.73 | -54.5% |
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. For the first half of FY2024, adjusted earnings per share is SGD0.054 per share which is sufficient to pay the dividend of SGD0.030 per share.
| Description | Amount |
|---|---|
| Net Profit | SGD 4,113,506 |
| Depreciation adjustment | SGD 3,318,331 |
| Adjusted net profit | SGD 7,431,837 |
| Number of shares | 139,031,881 |
| Adjusted earnings per share | SGD0.054 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 reporting date.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Revenue | -20.5% | Unfavorable |
| Earnings per share | -33.0% | Unfavorable |
| Operating Cash Flows | -43.2% | Unfavorable |
| Debt-to-equity ratio | 23.6% | Favorable |
| Interest coverage | 20.8x | Favorable |
| Price to Book Ratio | 4.85 | Unfavorable |
| Overall | | Neutral |
Overall, the metrics indicate that it is neutral to invest in MMH. Their fundamentals have stabilised at these levels, though it is weaker than they were a year ago. The favorable points are that they have no external borrowings and therefore, are not likely to be subjected to any accelerated repayment terms from their creditors which may disrupt their operations. Investors will need to keep an eye on the outlook for their industry. Should it continue to look unfavorable, this may cause the share price to fall further which will provide opportunities for those considering to add and ride the semi-conductor recovery when it happens a few years later.
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): 2024 First Quarter Result
