Micro-Mechanics achieved its record revenue and net profit for the 12 months ended 30 June 2017 (“FY2017”). In FY2017, the Group’s net profit increased 24.2% to S$14.8 million as a result of revenue growing 11.7% to S$57.2 million. It was an exciting year for Micro-Mechanics in 2017. Its share price rallied from S$ 0.86 to S$ 2.11 from the beginning to the end of 2017. It was a 245% return on capital gain alone, excluding dividend pay-out. Is there any growth left in the company for us to take a ride on? Let’s have a look further.
1. Stock Symbol
Ticker symbol: SGX:5DD
Market Capitalisation: S$ 282.23 million (30 March 2018)
Share Price: S$ 2.03 (30 March 2018)
2. The Business
Micro-Mechanics designs, manufactures and markets high precision parts and tools used in process-critical applications for the wafer-fabrication and assembly processes of the semiconductor industry. Micro-Mechanics creates consumable tools and parts used in the back-end semiconductor process, particular, die attach and wire bonding. Besides, it also manufactures precision parts and assemblies on a contract basis for original equipment manufacturers (OEMs). Recently, Micro-Mechanics started to build up capabilities to serve the front-end of the semiconductor industry through its US operations.
Micro-Mechanics serves a worldwide base of customers from five manufacturing facilities located in Singapore, Malaysia, China, the Philippines and the USA, and a direct sales presence in Taiwan and Europe. In FY 2017, China accounted for 26% of the total revenue to remain as the firm’s largest market. Besides, sales from its second largest market, Malaysia, account for 21% of total revenue which is S$11.9 million. The third largest market was the USA, which accounted to S$9.1 million.
From 2012 to 2017, Micro-Mechanics recorded continuous growth in revenue and shareholders’ earnings. The revenue increased from S$ 38.793 million to S$ 57.230 million, a compound annual growth rate of 8.1%.
However, its shareholders’ earnings increased at a much higher rate at CAGR of 28.5%, due to increase in net profit margin. From the graph below, Micro Mechanic’s net profit margin has increased from 10.9% to 25.8%. We can see that the management is committed to improving its business productivity and operational efficiency from the past performance.
Besides, Micro-Mechanics has a high and growing ROE. It shows that the management is able to utilise shareholders’ fund efficiently to generate profit for the company.
Source: Annual Reports
4. Balance Sheet Strength
Besides having exceptional growth in the past, the group has a strong balance sheet as well. It was operating its business with 0 debt, since 2011. This means that the group can run and expand their business with internal funds without borrowings from bank. This reminds me of a quote from Peter Lynch, Companies that have no debt can’t go bankrupt.
High Net cash
As at December 2017, the group reported a cash and cash equivalents of S$ 22.395 million. Thus, its net cash is also the same amount given it has no debt. With a shareholders’ equity of S$ 54.771 million, it gives the company a net cash to equity of 41%.
5. Future Prospect
2017 was a great year for the semiconductor industry. According to Semiconductor Industry Association, worldwide chip sales in 2017 reached US$ 412.2 billion, the industry’s highest-ever annual sales and an increase of 21.6% compared to the 2016 total. Semiconductor company besides Micro Mechanics, such as UMS Holdings (SGX:558) and AEM Holdings (SGX:AWX) saw a magnificent hike in their share price in 2017 as well.
According to Gartner, worldwide semiconductor revenue forecast to grow 7.5% in 2018, to a total of US$451 billion. Backed by an increase in demand for mobile devices and Internet of Things (IoT), the global semiconductor industry is currently in an up-cycle. As chips become increasingly used in nearly every aspect of our modern life, there will be a stronger growth in the industry as well.
Although semiconductor is highly cyclical, as long as chips are made, tools are required. Micro-Mechanics is the one who designs and manufactures consumable tools and parts used in the machines for assembly and testing of semiconductors. Therefore it has a limited downside when the industry is heading down cycles relative to semiconductor capital equipment makers.
Despite the highs and excitement of semiconductor industry outlook, one of the factors that investors may concern is none other than the Trump administration’s trade war. Semiconductors are one of the six “core industries” in Trump’s America First agenda, along with steel, aluminium, vehicles, aircraft and shipbuilding. Given that Micro-Mechanics’ largest market is China, there might be a risk associated with them. It would cause the electronic products that the US exports to other countries to increase in prices if those products contain Chinese-made components. An increase in prices means a decrease in demand and lower sales for semiconductor companies.
In my opinion, this current issue is not going to affect the company’s earnings in the long run. From its past track record, the company was well managed and run by a capable management team. Besides, the demand for semiconductor could only be higher.
As at 30 March 2018, Micro-Mechanics is trading at S$ 2.03 per share. The company has a net asset value per share of 39.4 cents and earnings per share of 10.6 cents. Hence its price to book value and price to earnings ratio is 5.15 and 19.2 respectively.
In FY 2017, Micro-Mechanics distributed a total dividend of 8 cents, which provides a dividend yield of 3.9%. In the past, Micro-Mechanics has been paying out a stable and increasing dividend. The steady revenue stream has enabled the company to generate high and consistent positive free cash flow. In addition, the management also has a firm dividend policy of paying out not less than 40% of earnings to shareholders.
8. Investors Relation
Micro-Mechanics (Holdings) Ltd.
31, Kaki Bukit Place
9. Major Shareholders
As at 31 August 2017,
- Christopher Reid Borch – 25.34%
- Sarcadia LLC – 27.16%
- Low Ming Wah – 5.13%