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Micro-Mechanics (Holdings) Ltd’s FY2018 Annual Report: 3 Things I Learnt From Management

Micro-Mechanics (Holdings) Ltd (SGX: 5DD) is involved in the designing, manufacturing, and marketing of high precision parts and tools used in the semiconductor industry.

The company released its annual report for the financial year ended 30 June 2018 (FY2018) last week. I learnt a few things as I was reading through the executive management statement, one of the many sections of the annual report. Here are three things that stood out for me.

A tight rein on costs

A company can make more profit by increasing its revenue and/or lowering its expenses. Micro-Mechanics is one such firm that has managed to grow its top-line, as well as decrease its costs to generate more earnings over the years.

In FY2018, revenue grew 13.8% year-on-year to S$65.1 million while overhead expenses (as a percentage of revenue) fell by 1.7 percentage points to 23.4%. As a result, net profit improved by 16.1% to S$17.1 million.

Micro-Mechanics’ management, comprising its chief executive officer, chief operating officer, and chief financial officer, said:

“We also continue to work diligently to keep a tight rein on our overhead expense structure. In FY2018, the Group’s total distribution, administrative and other expenses, including other income increased by just 6.1% to S$15.2 million. When measured as a percentage of sales, our overhead expenses declined to 23.4% as compared to 25.1% in FY2017.”

Over the longer term, the company has managed to reduce its operating expenses in an impressive manner, as shown below:
Source: Micro-Mechanics FY2018 Results Presentation

Revenue is a leading indicator of the industry

It is interesting to note that Micro-Mechanics’ revenue can serve as a barometer to the semiconductor industry’s growth. The management trio explained:

“Because the tools and parts we manufacture are typically purchased by our customers well before the sale of the finished chip is recorded, the Group’s revenue growth generally tends to reflect the future direction of the semiconductor industry. Indeed, our top line growth in 4Q18 slowed to 1.5% compared to 4Q17, which is in line with the industry projections for slower growth in the second half of 2018.”

According to the World Semiconductor Trade Statistics, the industry’s growth is expected to moderate to about 12.4% for the whole of 2018. This indicates a much slower growth rate of 4% to 5% in the second half of the year.

Focused on the long-term

As seen above, the semiconductor industry is cyclical. However, Micro-Mechanics does not worry about short-term fluctuations; it is focused on the long-term instead. The management team said:

“As such cyclicality is typical for the semiconductor industry, our approach is to focus on its long-term trends and not get preoccupied by short-term variations. We continue to believe the semiconductor industry is poised for a prolonged period of solid growth as chips are becoming increasingly embedded in nearly every aspect of modern life, from today’s smart phones to tomorrow’s driverless cars. Hence, the key to the Group’s success lies in our continuing ability to seize long-term opportunities and correctly identify the initiatives and investments that bring value to our customers.”

Indeed, as highlighted in my previous article, the world’s largest dedicated semiconductor foundry, Taiwan Semiconductor Manufacturing Company Limited, foresees long-term growth of the industry to be strong.

The Foolish takeaway

Micro-Mechanics is a sound business with great long-term industry tailwinds. It is heartening to note that the company is keeping costs low, and at the same time, focused on the long-term to grow its business further. I believe investors are in safe hands with Micro-Mechanics’ experienced management team.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Micro-Mechanics. Motley Fool Singapore contributor Sudhan P owns shares in Micro-Mechanics.