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Broker's take: PhillipCapital downgrades Micro-Mechanics to 'accumulate' on lower earnings

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Phillipcapital has lowered its call on high-precision parts manufacturer Micro-Mechanics after the firm's second-quarter earnings missed expectations, with revenues expected to stay suppressed by slower semiconductor demand and US-China trade uncertainty.

PHILLIPCAPITAL has lowered its call on high-precision parts manufacturer Micro-Mechanics after the firm's second-quarter earnings missed expectations, with revenues expected to stay suppressed by slower semiconductor demand and US-China trade uncertainty.

The brokerage downgraded Micro-Mechanics from "buy" to "accumulate" on Tuesday, and cut its target price to S$1.70 from S$2.05. Just before noon, Micro-Mechanics shares were trading 0.6 per cent higher at S$1.68. 

Paul Chew, head of research at PhillipCapital, said that the revenue slowdown has been "steeper than expected" and noted that revenues from China, Micro-Mechanics' largest division, were down 7 per cent year on year.

"Uncertainty over trade negotiations between the US and China has created caution in the supply chain and hesitation in carrying inventory," he said. 

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Adding to the pessimism, second-quarter gross margins fell to their weakest since Q4 2014, likely due to customer pricing pressure and higher production headcount. Depreciation, which rose 15 per cent year on year for Q2, also likely contributed to the weakness.

A bright spot could come from the firm's US operations - Mr Chew noted that the division targets front-end semiconductor equipment parts and could be the next major leg of growth. However, little was shared in terms of projects or programmes, he said.

PhillipCapital has also lowered its 2019 estimates for Micro-Mechanics' revenue and profit after tax and minority interests (Patmi) by 5 per cent and 12 per cent respectively.