Tuesday, February 06, 2007

Defying Gravity

Gravity defying - that's been the path for which the share price of Micro-Mechanics (Holdings) Ltd (MMH SP) (SIN: 5DD) (MMH) has been taking in the last few months. Since MMH was last featured on Margin of Safety (MOS) on August 2006 (S$0.48), investors in the semiconductor consumables supplier would have pocketed a 70% gain. Whilst the run up may partly have been attributed to the buoyant market sentiment, its management led by Christopher Borch, has also continued to deliver the results and reward shareholders.

The latter was evident in the 1H FY07 results unveiled yesterday. MMH managed to grow its revenue by 15% (vs 1H06) to S$17.7 million despite the loss of a customer in Singapore. This was due to the group's increased penetration into Taiwan and Europe. More significantly, net profit margin increased further to 25%. MOS believes that the custom machining and assembly (CMA) business which MMH has diversified into may be the reason behind this margin expansion. The growth of the CMA business from an insignificant share to 7.3% of total revenue also serves to help MMH diversify beyond the semiconductor industry. With the increasing net profit margin and top line growth, its EPS grew by 21% to 3.2 cents per share.

To foster share ownership amongst its employees, MMH has also announced a unique share offer cum gift scheme. Employees (or a family member) who meet certain pre-requisites are allowed to purchase shares from Mr and Mrs Borch at a sharp discount to the reference price of S$0.78. MOS views this as a refreshing move by the management when they clearly could have sanctioned a share option scheme which may potentially be dilutive to current shareholders in future. Should these purchasers subsequently sell their entitlements on the open market, the available free float also increases for this relatively illiquid counter. Whilst liquidity isn't a factor for the patient folks at MMH, it may well put the counter on the radar of the bigger and more established fund houses; thereby spurring added activity on the counter.

To reward shareholders, MMH is also declaring an interim dividend of 1.5 cents per share. This puts it on track to equal or best the total dividend of 3.5 cents per share paid in FY2006. Furthermore, the balance sheet of MMH remains debt free and its ROE remains high at 25.2% on an annualized basis.

Going forward, it is unclear how the fortunes of the global semiconductor industry will pan out. In fact, research consultancy Gartner has forecasted that growth is likely to slow. However, MOS remains confident that MMH's management will take all measures to keep the company on even keel.

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Anonymous donmihaihai said...


I do not think CMA is the reason or main reason for the expansion of NP margin. Some numbers:

1H2006 NP margin: 23.8%
1H2007 NP margin: 25%

Increase of 1.2%. Assume 1% of 1H2007 revenues = $177,029.

$177,029/ 1.29M(CMA revenues) = increased NP margin of 13.7%.

Well, the numbers don't look "right".

Next, depreciation charges. An MMH depreciation charge for P&E is 5 yrs. FY2006 MMH spent 1.9 million on Capex for CMA which increases the capacities by 140%. Assume of total of 3million spent on P&E for CMA, depreciation per year is $600,000, half yearly is $300,000. Check Note to financial statements, most of the Capex went to P&E. This kind of depreciation is going to kill CMA bottom line in term of P&L.

Margin expansion is more like due to increase contribution per employee and MMH position themselves as a "one-stop" solution for their customers as the increase in distribution and admin expenses did not catch up with revenues.

Since the customers of CMA are different from semicon, it is logic that distribution expenses increase at least inline with revenues.

Margin expansion is likely to come from the semicon segment.

I write some on my blog. :)

1:25 AM  
Blogger Mr Market said...

Thanks for your comments. The two reasons you gave are those cited by MMH in their briefing. The plausible contribution by CMA to net margins should be more apparent in the coming quarters as we are of the view that this line of business is a high margin one.

1:24 PM  
Anonymous donmihaihai said...


Where do you dig out information or what kind of experience and thinking lead to the view that CMA is of higher margin.

11:36 PM  
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