Watch for headwind
- 9M22 revenue aligned with expectations, though margins fell short
- (+) 9M22 revenue up c.11% y-o-y driven by China, US, and Malaysia markets
- (-) 3Q22 revenue slowdown, raw material concerns, lower net profit margins, and further risks from China COVID-19 restrictions
- Trimmed FY22/23F earnings by 12/15%; downgrade to HOLD with TP of S$3.42
Investment Thesis:
Downgrade to HOLD with TP of S$3.42. Despite 9M22 revenue increasing by 10.8% y-o-y, the group witnessed 3Q22 revenue decline by 3% q-o-q due to lower sales from the China market as a result of the government’s movement control measures. Furthermore, MMH’s US operations have also witnessed impacts due to raw material supply constraints. We trimmed FY22/23F earnings forecasts by 12%/15% in lieu of (i) a potential slowdown in sales from the US and China markets and (ii) lower margins amid rising raw material prices and higher effective taxes.
Semiconductor industry outlook remains healthy. 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. WSTS is projecting the global semiconductor market to grow by another c.10% in 2022.
Consumable nature of products contributes towards greater resiliency to industry swings. Consumable nature of MMH’s back-end tools and front-end equipment parts supports regular demand across the cycle. In most downturn periods, MMH’s revenue was observed to be relatively less impacted than its peers.
Industry outlook seems healthy, but watch for margins and headwinds. While we believe the industry outlook remains healthy, we are cautious of the ongoing headwinds, e.g., higher raw material prices and risks around US and China operations.
Valuation:
Downgrade to HOLD with revised TP of S$3.42. Our TP is pegged to a 27.0x FY22F PE, which is slightly below MMH’s +2SD historical forward PE ratios.
Where we differ:
We believe the semiconductor industry outlook remains healthy, based on various industry reports.
Key Risks to Our View:
Earlier/sharper-than-expected semiconductor industry downturn and/or significant cost pressures from suppliers.