by millionairemind » Thu Jan 22, 2009 7:28 am
Micro-Mechanics Holdings
Jan 21 close: $0.37
OCBC Investment Research, Jan 21
REELING from enormity of slowing economy: In the face of a sharp and sudden contraction in the global economy, Micro-Mechanics (MMH) announced that the group has witnessed a deterioration in orders from its customers during Q2 FY2009, the last three months of 2008. In December, MMH faced an unprecedented fall in customer orders across its worldwide manufacturing locations, thus leading the group to expect a y-o-y and q-o-q decline in its Q2 FY2009 revenue.
While we had earlier anticipated in our December sector report that the slower sales in its core semi-conductor tooling business are likely to be cushioned by its custom machining and assembly (CMA) segment, we now understand from MMH that it is expecting slowdown at its CMA plant in the US as well.
Moreover, as a result of higher operating costs and slow ramp-up in the US facility, MMH is expecting it to exert a substantial drag on its Q2 FY2009 net profit and margins.
Given the severe downturn in the global technology sector, the group is putting in place several measures to structurally lower its cost base. Specifically, MMH is: 1) conducting a group-wide programme to review and reduce (as appropriate) the salaries of its employees by 5-40 per cent; 2) strategically streamlining its organisational structure through a reduction in headcount; and 3) accelerating the transfer of technology from its CMA plant in the US to its Penang plant in Malaysia to improve its cost-competitiveness. Apart from these, we note that the group is currently in the process of implementing an integrated IT system to improve its operational efficiency.
Retain 'hold' with lower fair value: While MMH has a relatively strong financial position (cash hoard of $12.8 million and zero bank borrowings as at end-September 2008), we believe that the semi-conductor industry capitulation, together with faltering business volume and high input costs at its US facility, is likely to cast a pall on its FY2009 financial performance and share price.
As such, we conservatively revise down our FY2009 sales and net profit forecasts by 13.4 per cent and 12.5 per cent, respectively, to account for the poorer outlook, and reduce our fair-value estimate to $0.31, now based on a 7 times blended FY2009/10 EPS ($0.38 on 8 times FY2009 EPS previously). However, as MMH has already encountered depreciation in its share price following the profit guidance, we maintain our 'hold' rating on the stock.
HOLD
"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong" - Bernard Baruch
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