SINGAPORE (May 2): Phillip Capital is upgrading its call on Micro-Mechanics Holdings to “buy” from “accumulate”, albeit with a lower target price of $2.30 compared to $2.50 previously after trimming its earnings forecast by 10% for FY18E.
See: Phillip cuts Micro-Mechanics to 'accumulate' on 2Q results but investment merits still attractive
This comes after the group’s 3Q18 revenue at PATMI came in lower than expected, due to higher cost in capacity expansion and accounting changes which in turn impacted overall margins for the quarter.
In a Wednesday report, Phillip head of research Paul Chew says that while he previously overestimated the group’s ability to price up their services and margins, he remains upbeat on the group’s outlook considering expectations for semiconductor volumes to expand 7% CAGR over the next five years.
Valuations for the counter remains attractive, in his view, given an ROE of less than 30%, gross profit margins of about 58%, net cash of $18 million and a 4% dividend yield.
Its new target is at 17 times FY18E P/E, which is in-line with back-end semiconductor supply chain valuations.
Chew continues to see Micro-Mechanics as a low-beta proxy to the secular growth in semiconductors, and highlights the group’s more recurrent and less-volatile earnings given that the majority of its income is from the sale of semiconductor consumables.
Going forward, the head of research highlights front-end semiconductor tools as Micro-mechanics’ next phase of growth.
“In 3Q18, USA revenues were up almost 30% y-o-y and now represent the second largest market by geography and the fastest-growing. We were surprised that the turnaround in USA did not yield high gross margins for the group. We can only deduce the current back-end business is encountering stiffer selling price pressure,” comments Chew.
Shares at Micro-Mechanics were up by 2 cents at $1.84 before the midday trading break.
