Longer Term Trend Intact
(+) FY22 revenue reached a new record, up 12% y-o-y, in line with expectations. FY22 revenue grew by 12% to a record S$82.5m, on the back of the continued growth of the global semiconductor industry and higher sales growth in the company’s three largest markets, i.e., China (+18% y-o-y), Malaysia (+11% y-o-y), and USA (+19% y-o-y). The group witnessed healthy overall revenue growth despite its sales in USA and China being impacted in 2HFY22, the latter of which was a result of the government’s movement control measures. 4Q22 revenue grew by 15% y-o-y, driven by sales growth in China (+7% y-o-y, -3% q-o-q), Malaysia (+3% y-o-y, -8% q-o-q), and USA (+47% y-o-y, +42% q-o-q). FY22 capacity utilisation rate grew to 61% (FY21: 57%), alongside the higher sales.
(-) FY22 gross margins declined to 53.4%, with gross margins continuing to see pressure. The group’s FY22 gross margins declined to 53.4% (FY21: 54.3%) on the back of higher material costs (e.g., aluminium and steel for US subsidiary) and operating expenses (e.g., fuel, manpower costs). FY22 gross margin was aligned with our estimate of 53.0%. However, 4Q22 gross margin declined to 51.6% amid continued cost pressures.
(-) US subsidiary saw operating losses in FY22. US subsidiary (MMUS) witnessed FY22 operating losses of S$0.06m (FY21: Operating profit of S$1.2m). Losses from US subsidiary were a result of (i) lower-than-expected sales growth and (ii) ongoing raw material/manpower challenges. Rising raw material and manpower prices have led to an erosion in gross margins due to the lag in MMUS’s price increases vis-à-vis its cost increases.
(+) However, FY22 net profit was above expectations, due to tight control on overhead expenses. FY22 net profit is at S$19.8m, 13% above our estimates. FY22 net profit margin is at a healthy level of 24.0% (FY21: 24.5%) amid rising costs, above our estimate of 22.0%. 4Q22 net profit margin grew to 26.7% (3Q22: 22.5%, 4Q21: 25.0%) due to the tight control on overhead expenses as a % of revenue.
(+) Healthy balance sheets. The group remains in a sound financial position. As at 30 June 2022, its total assets stood at S$73.7m, shareholders’ equity at S$58.3m, and cash and cash equivalent at S$20.4m, with no bank borrowings.
(+) Healthy macro outlook guided. SEMI forecasts 31 new chip fabrication facilities to be built in China over the next four years. Major equipment makers have reported plans to build 12 wafer fabrication plants in USA and several in Singapore, with efforts to use Singapore and Malaysia as a hub for building wafer fabrication and assembly equipment. The group’s presence in these markets could make it a potential beneficiary.
(+) Steady capex and dividends a positive signal. Capex earmarked for FY23 is at S$5.0m (FY22: S$4.9m, FY21: S$6.8m), with capex mostly channelled into new production equipment. The group declared a FY22 DPS of 14 Scts (FY21: 14 Scts), which translates to a dividend payout ratio of 98% (FY21: 108%). We believe the group’s dividend payouts are sustainable, given its steady operating cash flows and cash balances over the years. Going forward, we anticipate the group to pay out a constant DPS of 14 Scts, translating to a FY23F/24F dividend payout ratio of 94%/86%.
Our views:
(+) We expect revenue growth of 10%/7% for FY23F/24F. Gartner forecasts global semiconductor revenue to grow by 7.4% in 2022. WSTS estimates another 4.6% growth in 2023. In most downturn periods, the group’s revenue was observed to be relatively less impacted compared to its peers, which is because of the consumable nature of its back-end tools and front-end equipment parts, which supports regular demand across the cycle. Albeit more muted in relation to the growth of previous years at 15%/12% in FY21A/22A, amid a moderating market, we estimate a revenue growth of 10%/7% for FY23F/24F for the company.
(-) Pressures on gross margins to persist in FY23F; expect improvement by FY24F. We assume (i) lower gross margins of 52.0% (FY22: 53.4%) and (ii) net margins of 22.7% (FY22: 24.0%) amid continued inflationary pressures (e.g., raw materials, labour costs). We also anticipate gross and net margins to normalise to 53.0% and c.23.5% by FY24F, as inflationary pressures ease and as the group passes down higher costs to its customers.
Maintain HOLD with unrevised TP of S$3.42. While we believe the semiconductor industry outlook remains healthy, we are cautious of the ongoing headwinds, e.g., higher raw material and labour prices. Our TP is based on FY23F EPS of 14.8 Scts, pegged to c.23.0x FY23F PE (previously 27.0x), near +1SD of MMH’s historical forward PE ratios.
