DBS Group Research analyst Ling Lee Keng and its Singapore research team has initiated a “buy” rating on Micro-Mechanics Holdings (MMH), and target price of $4.05, offering a potential upside of 28%.

Micro-Mechanics (MMH) is currently trading at 21.9 times FY2022 price-to-earnings (P/E), near +1 standard deviation of its four-year historical average forward P/E, according to Ling.

“We believe that there is still legroom for growth in the semiconductor cycle, and we anticipate a further re-rating towards its historical peak multiple into 2022,” she writes in a Dec 7 report.

The semiconductor industry is expected to grow approximately 9% in 2022 and see a compound annual growth rate of 8% in 2020-2025, led by drivers such as Internet of Things (IOT), 5G, and automotive demand, according to the analyst.

The consumable nature of products of MMH contributes to greater resiliency towards industry swings, says the analyst. “Consumable nature of MMH’s back-end tools and front-end equipment parts support regular demand across the cycle,” he says. “In most downturn periods, MMH’s revenue was observed to be relatively less impacted.”

MMH’s earnings outlook and stable dividend yields are supported by strong balance sheets, says Ling. “We project MMH to achieve a net profit compound annual growth rate of 10% between FY2021 to FY2023, with a stable dividend yield of 4.1%,” he said.

<span class='see_also_inread'><b>See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='/capital/brokers-calls/keppel-corporations-acquisition-aermont-capital-checks-all-boxes?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>Keppel Corporation’s acquisition of Aermont Capital ‘checks all boxes’</a></b></span>

Ling also observed that MMH is in a strong financial position because of its zero debt as well. “MMH has no borrowings, which we believe could help the company weather cyclical downturns more effectively,” says Ling. “In addition, the company is able to generate strong cash flows, enabling it to fully fund its capital expenditure even during periods of slowdown, without relying on debt.”

MMH has seen a steady uptrend in its free cashflows/estimated cashflows from operations less capex over the years, according to the analyst.

Some risks noted by the analyst include earlier and sharper-than-expected semiconductor industry downturn and/or significant cost pressures from suppliers.

At 1.40pm, shares in Micro-Mechanics Holdings are trading 16 cents up and 4.94% higher at $3.40.

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