Friday, August 18, 2006

Small is Beautiful

As the title of this post suggests, the counter being introduced is a small capitalisation company. In fact, its market capitalisation is about S$65 million. Interestingly, its name connotes a link to the sub-micron kingdom too.

Micro-Mechanics (MMH SP) designs and manufactures a wide range of precision tools, parts and consumable products which are used by semiconductor firms to assemble and test chips.

MMH's primary focus is on the die attach and wire bonding processes. It is currently extending its capabilities to include custom machining and assembly, and consumable products for the encapsulation process. In order to serve its wide international customer base (over 300), MMH has five manufacturing facilities located in Asia, namely, Singapore, Malaysia, China, Thailand and the Philippines.

Being a site associated with the value style of investing, it may come as a surprise to introduce a firm related to the cyclical semiconductor industry. Whilst statistics from the international industry association, Semiconductor Equipment and Materials International point to the industry holding up well, skeptics about MMH should examine its financials to see how resilient its earnings has been despite being in the volatile industry. Since listing in 2003, it has consistently maintained a gross profit margin in excess of 60%! In the same vein, its net profit margin is a healthy 20%. Eyeballing its balance sheet also reveals that it has no long term debt. In addition, MMH has been able to manage its capital expenditure with internally generated cash flow. In fact, its cash flows have remained healthy despite one major capital expenditure exercise in FY2005 to build a new plant in China and improve the Singapore and Malaysian factories. Its management has also been willing to fork out any excess cash to reward shareholders.

We also rank MMH’s management highly. Founder and President Chris Borsh has over 20 years in the industry and he communicates candidly to his shareholders. He also demonstrates alignment of his personal interest by continuing to hold over 30% of MMH's shares after listing.

Investors who stare at charts are likely to be deceived by its relatively flat price movement. In order to appreciate the full extent of its historical price, one needs to factor in its several capital structure changes. For example, it issued an extra one share for every four held last year. The willingness for a company to issue new shares (a move which will dilute per share measures such as EPS unless the earnings increase at a faster rate than the increase in number of shares) speaks volumes of the confidence that its management has in its prospects.

Going forward, MMH is seeking to diversify into the precision manufacturing business. Since starting its Custom Machining and Assembly division in 2005, it has received orders from customers from the medical, instrumentation and high tech equipment fields.

Indeed, MMH’s prospects are looking rosy in the near term too. We expect MMH to report record FY2006 earnings soon and register at least 25% YOY earnings growth. The current historical P/E is approximately 11x. Should our earnings forecast materialize and its P/E holds up, MMH's fair value is north of S$0.58.

MMH closed at S$0.48 today.


Sunday, August 06, 2006

Embrace Capitalism

Nearly a year ago, readers of this blog were introduced to FEH SP. FEH SP is a food and beverage company with a huge footprint in Russia and several other emerging markets. In Russia alone, their prospects are tremendous. Russia have rapidly embraced capitalism in the last 6 years and now has an economy that is humming along with a GDP just off a shade of a trillion dollars.

FEH SP has been able to capitalise on the rising Russian tide. Based on last Friday's close, the counter has chalked up in excess of 30% p.a. return and padded our pockets with consistent yields of 4-5%.

Three other counters were introduced to readers then. The stunning performance of Sarin was analysed recently but the counter has since fell from stratospheric heights. The chief causes are due to issuance of guidance that the diamond industry will slow down and the ongoing Lebanon conflict. This knife edge drop also reflects our dislike for companies which have been chased up by market punters. A year ago, the counter was a diamond in the rough. But after turning in good results, its growth prospects were overly touted, thereby leading to a rich P/E. As always, such a backdrop is a recipe for disaster when the growth potential does not materialise. We can only hope that readers have realised their gains.

On a brighter note, the two other counters featured a year ago have been taken private, underlining their under-valuation. The returns for both were good, in particular, that for TASH SP, aka Total Automation which rewarded shareholders with a handsome payout.