It has been a tough two years for Micro-Mechanics Holdings Ltd (SGX: 5DD). Slowdown in the global semiconductor industry with elevated inventories in 2022, led to a much lower demand.
Revenue dropped from a high of S$82.5 million in 2022 to S$67.0 million in 2023. Consequently, its net profits also declined sharply from S$19.8 million to S$9.8 million.
In the latest financial year (FY) 2024, revenue and net profit declined further, dropping by 13.6% and 17.7% year-on-year to S$57.9 million and S$8.0 million, respectively.
The last time the revenue was at this level is a good seven years ago in 2017! The difference is the gross profit margin was 57% then, and it has dropped to 47% in the latest two years.
“Significant decline in revenue led to underabsorption of costs as our cost structure is largely fixed in nature”
AGM 2023 Presentation Slide 13
One thing I appreciate about Mirco-Mechanics is its transparency and well organised information. Hence, it took me just a moment to find out that its capacity utilisation rate was at 58% in 2017, 61% in 2022, 54% in 2023 and 44% in 2024.
I wonder what is its optimal utilisation rate? Maybe, this is a question that I can pose to them for the upcoming AGM.
Recovery in sight?
It is not all gloom and doom for Micro-Mechanics.
Firstly, it has remained profitable during an industry downturn.
Secondly, there are signs of recovery in the latest quarter numbers. The decline in revenue has decreased and with their effort to contain cost, they have managed to increase its net profit over the past two quarters. Increase in capacity utilisation in 4Q 2024 provides another indication that the worst might be over.
Can dividends be sustained?
Micro-Mechanics has always been generous with its dividends.
The group has a formal dividend policy to distribute 40% or more of its after-tax annual earnings, after taking into consideration financial performance, projected cash flow and capital requirements for business growth and general economic conditions among other relevant factors.
However, for many years, it has paid out dividends close to or exceeding 100% of its net profit after tax! As mentioned in an earlier post, they are able to pay out more than 100% of its net profit, as it could typically generate more operating cash flow than its net profit.
For FY2024, while its dividend payout ratio is 104%, the dividends made up only about 69% of its free cash flow. The company is able to increase its cash position by 17% YOY to S$16.4 million.
Hence, Micro-Mechanics willingness to pay dividends is never an issue. However, we have to accept that whenever the group goes through a downturn, the dividends will be cut.
Considering the cyclical nature of semiconductor industry, perhaps it might be a better idea to consider the average dividends, excluding special dividends, that one can received over a decade.
The average dividends for the past decade is 8.2 cents. Will this good enough for the next decade?
I will be holding on to my current stake.
Discover more from Towards Financial Independence
Subscribe to get the latest posts sent to your email.