Brokers’ take: DBS cautious of ongoing headwinds for Micro-Mechanics, downgrades to 'hold'

DBS has downgraded Micro-Mechanics Holdings : 5DD 0% to “hold” from “buy”. The research team also cut its target price on the semiconductor play to S$3.42 from S$4.05.

Although the industry outlook remains healthy, DBS is cautious of ongoing headwinds, including higher raw material prices and risks around the group’s US and China operations.

The new target price is 27 times the research team’s FY2022 earnings estimates. The new target also implies a potential upside of 11 per cent from the company’s last trading price of S$3.08 as at 3.02 pm on Wednesday (May 4). The counter was up 2.8 per cent or S$0.09 at the time.

In a report on Wednesday, DBS trimmed its FY2022-23 earnings forecasts for Micro-Mechanics by 12-15 per cent in lieu of a potential slowdown in sales from the US and China markets. The research team also expects lower margins amid rising raw material prices and higher effective taxes.

Accordingly, it has adjusted its revenue estimates slightly downwards to S$80 million from S$81.6 million for FY2022 and S$83.5 million from S$86.5 million for FY2023.

The research team also revised its net profit margin projections for FY2022-23 to around 22 per cent, which is more conservative than Micro-Mechanic’s management’s forward guidance of about 23-25 per cent.

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DBS noted that the group has a sound financial position, with S$15 million in cash and no bank borrowings.

Micro-Mechanics manufactures consumables used in the chip testing and assembly process of semiconductors and contract manufactures precision parts used in critical processes during wafer fabrication.