Phillip Capital cuts Micro-Mechanics earnings forecasts, but upgrades it to Buy

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Phillip Capital cuts its earnings forecast and target price for Micro-Mechanics after fiscal third-quarter earnings missed expectations, but it still upgraded the stock to Buy.

The company reported in late April that its net profit for the fiscal third quarter was S$4.1 million, up 18.7 percent on-year, while revenue was up 12.9 percent at S$16.1 million, mainly on higher sales in China, the Philippines and the U.S.

It cut its fiscal 2018 earnings forecast by 10 percent after the earnings miss, saying margins were hurt by higher costs for capacity expansion and accounting changes. That lowered its target price to S$2.30 from S$2.50. But it still expected revenue to rise 17 percent for the full year.

However, Phillip upgraded the stock to Buy.

“We are still upbeat on the outlook for MMH. We were too aggressive on their ability to price up their services and margins. Unit volume growth in semiconductors remain the core revenue driver,” it said.

It expected semiconductor volumes would grow at a 7 percent compound annual growth rate (CAGR) for the next five years, with the growth drivers shifting from smartphones to newer applications, such as smart speakers, NAND flash, lighting and auto.

“We view MMH as a low beta proxy to the secular growth in semiconductors,” it said. “Semiconductors are penetrating into more non-traditional applications from electric vehicles to IOT devices. MMH earnings are more recurrent and less volatile as the majority of their income is from the sale of semiconductor consumables.” Consumables are parts required for the production of semiconductors.

The stock ended Thursday at S$1.84.