Micro-Mechanics (Holdings) Ltd (SGX: 5DD) designs, manufactures, and markets consumables and precision tools used in the semiconductor industry. As of the time of writing, Micro-Mechanics’ shares are down 5.2% to S$1.63 apiece. What could have caused the sudden fall in the share price? The most likely reason is its poor set of third-quarter financial results, announced by the company on Saturday.
The following shows some key financial highlights from Micro-Mechanics’ third quarter, which ended on 31 March 2019 (Q3 2019):
- Revenue fell 10.7%% year-on-year to S$14.36 million.
- Gross profit tumbled 21% to S$7.08 million. As a result, its gross profit margin decreased from 55.8% to 49.3%.
- Net profit plunged 36.5% to S$2.61 million.
- Consequently, diluted earnings per share (EPS) declined from 2.96 cents a year ago to 1.88 cents.
- Micro-Mechanics’ balance sheet carried S$18.97 million in cash with no debt, as of 31 March 2019. The net-cash position slightly increased from the end of March 2018, where the cash balance stood at S$18.85 million.
- Operating cash flow for the reporting quarter improved by 2.3% from S$5.24 million a year ago to S$5.36 million. With capital expenditure falling from S$3.36 million to S$0.90 million, Micro-Mechanics’ free cash flow more than doubled from S$1.88 million to S$4.46 million.
The fall in revenue was primarily due to the cyclical slowdown in the global semiconductor industry that began in the second half of 2018. Sales were lower across all of the company’s geographic markets, except the US.
It is commendable that Micro-Mechanics had a tight lid on its admin, distribution and other operating expenses in the third quarter. The costs, which totalled S$3.67 million for the quarter, fell 1.7% year-on-year and 4.5% quarter-on-quarter. Amid an industry downturn, companies should ensure that costs do not spiral out of control, which Micro-Mechanics has achieved.
As a result of the global semiconductor industry slowdown, as well as higher overheads and an increase in production headcount, net profit also tumbled. The higher overheads were due to higher depreciation costs as a result of record capital expenditure in FY2018 of S$12.12 million. For FY2019, Micro-Mechanics expects to incur capital expenditure of around S$4 million.
Data from the Semiconductor Industry Association (SIA) shows that worldwide semiconductor sales in January and February 2019 decreased by 12.3% year-on-year, moving into the contractionary phase of its cycle.
The World Semiconductor Trade Statistics (WSTS) now expects the global semiconductor market to decrease by 3.0% to US$454.5 billion in 2019. In its previous forecast in November last year, the WSTS projected global chip sales to grow 2.6% to US$490 billion in 2019.
Micro-Mechanics’ chief executive, Chris Borch, said the following in the earnings release:
“While growing the Group’s top line and the value we create for our customers remains a key priority, we also recognise that such short-term fluctuations in business conditions are normal and inevitable in the semiconductor industry. We prefer to focus on the industry’s long-term trends and try not to get side-tracked by these short-term variations.
Hence, our practice is to continue working tirelessly towards achieving long-term goals such as increasing automation and repeatable processes in our manufacturing operations, as well as building stronger customer engagement.”
The Foolish takeaway
The slowdown in the semiconductor industry has continued to affect Micro-Mechanics’ revenue and earnings. However, with the company’s strong balance sheet, it can most likely ride through the tough times. It is also focused on the long-term industry growth trends, which it can capitalise on.
At Micro-Mechanics’ current share price of S$1.63, it is selling at a trailing price-to-earnings ratio of 15.9 and a dividend yield of 5.5%, excluding any special dividend.
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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 (Holdings) Ltd. Motley Fool Singapore contributor Sudhan P owns shares in Micro-Mechanics (Holdings) Ltd.