SINGAPORE (Jan 31): Phillip Capital is downgrading Micro-Mechanics to "accumulate" given the run-up in its share price and lack of a catalyst to raise its target price.
And although Micro-Mechanics' 2Q18 revenue of $15.6 million is still a record for the company, Phillip says it was "disappointed" as the deceleration in topline growth was faster than we expected.
See: Micro-Mechanics posts record 1H earnings of $9.1 mil
With October and November semiconductor sales up a combined 21% y-o-y, analyst Paul Chew says he was expecting stronger revenue and earnings growth.
While part of weaker topline was due to currency movement and perhaps some trade loading, 2Q18 did miss Phillip's forecast.
"We are reducing our FY18 revenue and earnings by 6% and 7% respectively," says Chew.
In mitigation, the analyst says visibility is never perfect for the semiconductor cycle. In the last two cycles, the positive y-o-y growth ran for 20 and 26 months.
As the current upcycle is 16 months, he is concerned the comparables could get harder as we approach calendar 2018.
"As a result, we have to taper down our expectations," says Chew.
Nevertheless, he takes away a few positives from Micro-Mechanics' 2Q.
Revenues in the United States were up 34% y-o-y and now represent the 3rd largest market by geography and the fastest growing.
"The expansion into US market is critical for us," says Chew, "It represents Micro-Mechanics’ penetration into a new revenue stream and much larger market, the front-end semiconductor supply chain."
In addition, the company has upped its interim dividend by 33% to 4 cents.
"The attractive investment merits of Micro-Mechanics have not changed," says Chew, "ROE of more than 30%, 60% gross profit margins, net cash $22 million balance sheet and 3% dividend yield."
As at 9.56am, shares in Micro-Mechanics are down 3 cents to $2.32 or 15.5 times FY18 forecast earnings.
