PhillipCapital has upgraded Micro Mechanics Holdings (MMH) to “buy” from “hold” after a strong 4Q20 profits showing by the company. The brokerage has also raised its target price on the counter to $2.50 from $1.60 previously.

PhillipCapital’s head of research Paul Chew said the company’s 4Q20 profits came “in line with expectations”, with the company recording a 48% jump in profit after tax and minority interests (PATMI) to $3.9 million. 

Furthermore, Chew noted that gross margins have recovered to their highest levels in seven quarters and believes higher prices was a reason for the improvement.

He also said after several years of development, the company’s US operations has secured a “significant breakthrough in new front-end projects and customers.”

As such, Chew thinks this will be a new growth segment for MMH. He has thus raised his earnings forecast for FY21 by 25%.

He noted that MMH managed to grow revenues despite production disruptions during the quarter. MMH also enjoyed gross margins of 55.5% in 4Q20, the highest in seven quarters. Margins were surprisingly high despite the weaker utilisation rate of 56% compared to 58% a year ago. 

Chew believes there was better pricing power in 4Q20 as customers needed to create buffers in their inventory levels with worries over possible disruption to the supply chains, and highlighted a move in inventory levels from just-in-time (JIT) to just-in- case (JIC).

In light of the strong showing, dividends were raised by 17%. The final MMH for FY20 was unchanged at five cents, but special dividends doubled to two cents. 

Chew also said MMH has been paying special dividends for the past five years, and this “seems to be normal rather than special.” Therefore, the blended increase is 17%, and total dividends for FY20 has increased by 20% to 12 cents. 

As at 12.11pm, shares of MMH were trading at $2.33, with a dividend yield of 5.9%