I can’t remember when was the last time I stepped into Shenton Way! Luckily, there’s Thomson East Coast line now, and so it is quite a convenient walk from the station to Capital Tower.
Micro-Mechanics also released their Q1 results at noon time, before the AGM. If I remember correctly, they always try to do that, so that they can also answer some questions on their current year outlook during the AGM. The AGM slides which include some data from Q1 can be found here.
As expected, Q1 continues to underperform last year but there’s reason to be optimistic for the remaining quarters. For two consecutive quarters, revenue and net profit has increased! If they can maintain the momentum and barring any unforeseen circumstance, they might report growth from next quarter onwards.
My key takeaways from AGM
Do view their responses to shareholders’ questions, which they provide clear answers to the questions asked before AGM. I also just found out that there is a page on their site with compiled frequently asked questions by investors over the years. It is a good read to learn more about the company.
Again, what I am going to share next are not verbatim but interpretation of what my foggy mind remembered. So take it with many pinches of sodium chloride.
Segmental Information
Looking at the segmental information, it seems that the impact was felt more for the production of critical parts for the wafer fabrication equipment industry (ie, MMUS). Primarily because that’s the only loss making segment last year.
However, looking at the past 3 years data, the recent downturn did affect all segments. The only reason why the other segments were still profitable is simply because of greater margin. US plant which focuses on front end is probably still in the process of winning more customers and scaling up.
When chatting with us, Deputy CEO Kyle briefly mentioned that the front end has greater addressable market but competition is tougher and it’s not easy to larger competitors that are well-entrenched with customers. However, they will keep going at it and as mentioned in shareholders’ letter, they have made a strategic decision to narrow their engineering focus to four main product areas for the wafer-fabrication equipment sector.
I like what CEO Chris said about not knowing how to get a better crystal ball but what they can do is to build better shock absorbers.
Looking at the Q1 information, China and Malaysia are the two markets that shown the greatest improvement from previous quarters. The drop in Singapore market has to do with the sales of wafer fab parts from US market to SG wafer plants. I believe there is some inter-segment revenue involved here. I don’t quite understand how it work but am not too concern with it for the moment.
US revenue is pretty stable quarter on quarter and given that they will eliminate about $2 million in annual operating costs at MMUS, it is very likely that US segment will be profitable this year.
People and Leadership Transition
“People Make Everything Happen!”
This saying from the group always resonates with me. I do sense that the company is closely knitted from the interaction of the staff before the start of the AGM – catching up with each other and taking photos.
The year saw two veterans CFO Mr. Chow Kam Wing, and COO Mr. Low Ming Wah leaving the company. While it’s never easy for any company when key experienced personnel left, it provides opportunity for the company to inject new energy to bring the group to the next level. Looking at the downturn positively, Chris said that this has provided time and space for leadership transition. Not only at the key personnel level but also throughout the organisation.
It’s too early to see the impact that Kyle and the new team is going to bring to the group. For the moment (at least during the AGM), Chris is still fronting but you can see that he is trying to bring Kyle in. I am pretty sure we will hear more from him in the coming few years.
Dividend Sustainable?
I really do not know for sure at the moment as it depends on how things progress going forward. My back of envelope computation is as below, done with lots of assumption which might not come true!
- Cash after paying out 3 cents dividend ~ $12.7 mil
- Annualising Q1 OCF for full year ~$14.2 mil
- Cap-ex for the year ~ $4 mil
- 9 cents dividend would require $12.5 mil
So if my projection comes true, then free cash flow and cash balance is able to support the dividend with about $10 mil left in the kitty. However, the question is would it be better to retain more cash for future investment in the company?
Personally, if investing a bit more in MMUS would result in gaining future revenue growth, then I would prefer less dividend.
In short
Micro-mechanics is a very small contract manufacturer, producing precision tools and parts in the semiconductor industry. Undaunted by its size, it has benefited from the rise of the industry over the decades and survived the numerous downturns. Investing in it means to believe that they can continue to do that for the next decade and return their excess cashflow to shareholders in the form of dividend.
I will continue to participate in their journey.
Interesting snippet
It is the first time I am doing voting by paper and pen at an AGM! The meeting was adjourned for half an hour after the voting for the votes to be verified. That provided some time for the shareholders to mingle with the management.