Tiding Through the Semiconductor Cycle

•       Semiconductor uptrend intact; revenue to grow at 5-year CAGR of 8%

•       Consumable nature of products to support resilient demand throughout the cycle

•       Estimated 10% net profit CAGR from FY21-FY23F

•       Initiate coverage with BUY with TP of S$4.05, implying potential upside of 28%

Initiate with a BUY and TP of S$4.05, offering a potential upside of 28%. Micro-Mechanics (MMH) is currently trading at a 21.9x FY22F PE, near +1 standard deviation of its four-year historical average forward PE. We believe that there is still legroom for growth in the semiconductor cycle, and we anticipate a further re-rating towards its historical peak multiple into 2022.

Supercycle still has legroom for growth. While we expect growth to moderate going forward, the long-term uptrend remains intact. The semiconductor industry is expected to grow c.9% in 2022 and see a CAGR of 8% in 2020-2025, led by drivers such as Internet of Things (“IOT”), 5G, and automotive demand. 

Consumable nature of products contributes to greater resiliency towards industry swings. Consumable nature of MMH’s back-end tools and front-end equipment parts support regular demand across the cycle. In most downturn periods, MMH’s revenue was observed to be relatively less impacted.

Firm earnings outlook and stable dividend yields supported by strong balance sheets. We project MMH to achieve a net profit CAGR of 10% between FY21A to FY23F, with a stable dividend yield of 4.1%. We believe MMH’s zero debt will also enable the company to weather industry swings more effectively.