As expected, it was a weak Q4 for Micro-Mechanics. Revenue decreased by 31% and net profit dropped by a whooping 66%. The good news is that on a QoQ basis, there is an uptick in both top and bottom lines.
The above two slides show their revenue and net income over the past 6 years. I always like how they have incorporated the quarterly results in the graphs. It provides much clarity on their performances over the years. I have not dug into the numbers but registering a lower net profit when its revenue is higher than the period from FY2018 to FY2020 indicates an increase in cost over these years.
On Dividend
The group has highlighted in their Q3 report that given the uncertainties in recent time, they would retain more cash this year and pay less dividend. They declared a 3 cents final dividend which is higher than the 2 cents that I was expecting. I agreed with the decision as this should allow a more sustainable dividend in the longer run. The dividend payout ratio over the past few years does look scary.
However, the group has a proven record of generating operating cash flow higher than its earning, so it might be more useful to look at payout ratio from free cashflow perspective. With the readily available information provided the group, I decided to to compute the dividend payout ratio based on the free cashflow over the past 6 years.
| ($ mil) | FY2018 | FY2019 | FY2020 | FY2021 | FY2022 | FY2023 |
| Cash and Equivalents | 21.1 | 21.9 | 20.8 | 20.6 | 20.4 | 14.1 |
| Free Cash Flow | 10.3 | 15.9 | 15.1 | 18.9 | 20.3 | 13.7 |
| Dividend | 13.9 | 13.9 | 16.7 | 19.5 | 19.5 | 12.5 |
| Dividend Payout Ratio (FCF) | 135% | 87% | 111% | 103% | 96% | 91% |
As seen from the computed information, the group’s cash position has remained relatively steady despite the increasing dividend from FY2018 to FY2022. However, that takes a hit this year as the cash flow generated this year could not recuperate the dividend paid for FY2022 final and special dividend of 8 cents and FY2023 interim dividend of 6 cents.
So while I appreciate the group in rewarding the shareholders over the past few years, I am glad that they decided to retain more cash this year for a more sustainable payout going forward.
What to expect in FY2024?
Warning: The next few paragraphs include projections based solely on my imagination. DO NOT take it for real.
I think the worst is likely to be over for this cycle and things should look brighter or at least not worsen for FY2024. Depending on how strong the recovery is (if any), revenue could come in between $64 mil to $72 mil, with corresponding net profit would be around $11 mil to $14 mil.
Free cash flow would then be north of $15 mil and hence it’s likely that they can continue to pay out the 9 cents dividend. Not much margin of safety though and it begs the question on how the company intents to grow the business for the next decade.
What am I going to do?
I am looking forward to attend the AGM in October to hear from the management and find out more about their plan going forward.
As for my shareholdings, I divested partially in May and will continue to hold on to my current stake. I might add back a bit if opportunity arises.
Related Links
Micro-Mechanics FY2023 Results Presentation