• Major beneficiary of bottoming semiconductor industry.
• Relatively low risk counter with no debt and strong cash flow generating ability.
• Attractive dividend yield of 5.6%.

Micro-Mechanics - the Business

Semiconductor equipment components maker.

• MICRO-MECHANICS (SGX:5DD) is a manufacturer of consumable parts and tools used in fabrication, chip testing and assembly of semiconductors. The company has one factory each in the US, China, Singapore, the Philippines and Malaysia.
• See Micro Mechanics Announcements; Micro Mechanics Latest News;

Potential turnaround ahead coupled with structural industry changes.

• The semiconductor industry appears to be reaching the tail end of the downcycle. This combined with technological advancements such as the Internet of Things, cloud data storage and a transition to 10-nanometer and below geometries should drive demand for Micro-Mechanics’s components and tools going forward.

Zero debt; high operating cash flows.

• Micro-Mechanics has no borrowings, enabling the group to weather downturns better than most. In addition, the group is able to generate strong cash flows, enabling it to fully fund capital expenditure even during a slowdown to boost production quickly when the cyclical semiconductor industry rebounds.

Micro-Mechanics - the Stock

Fair value of S$2.13.

• The fair value of S$2.13 implies 19.8x FY20F PE which is +1SD from its 2-year historical mean. See Micro Mechanics Share Price; Micro Mechanics Target Price.
• We think this is justified given the potential upswing in the semiconductor cycle and Micro-Mechanics’s high FY20F dividend yield of 4.7% at its fair value. See Micro Mechanics Dividend History.

Potential Catalysts:

• Formal end to US-China trade war; higher dividend payouts; M&A activity.

Potential risks:

• Resurgence of US-China trade war which could dampen manufacturing confidence; sudden downturn in semiconductor industry.

Source: DBS Research - 29 Nov 2019