PhillipCapital’s head of research Paul Chew has downgraded his recommendation on Micro-Mechanics Holdings to “neutral” from “accumulate” on stretched valuations.

Chew has, however, upped his target price on the counter to $3.35 from $2.93, as he increases FY2021 ex-cash price-to-earnings (P/E) from 18 times to 21 times, in line with its peers.

“Recent share-price rally has priced in its positive outlook and long-term merits such as 4% yields, 35% ROEs and a net-cash balance sheet,” says Chew on the recommendation downgrade in a Feb 8 report.

Micro-Mechanics, on Jan 29, reported a record quarterly revenue of $18.7 million for the 2QFY2021 ended December, 15.2% higher than revenue of $16.3 million in the year before.

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Net profit for the quarter climbed 33.0% y-o-y to a record $9.1 million.

The higher top and bottom lines were attributable to “buoyant conditions” in the semiconductor industry, according to Micro-Mechanics.

The quarter’s revenue and net profit came within Chew’s expectations at 25% and 23% of his full-year forecasts.

“Sales in China were up 28%, followed by +18% in the US. China’s growth reflected the industry’s pick-up in semiconductor demand while US sales captured contributions from a new front-end programme that involves semiconductor parts for gas handling in a vacuum chamber. We believe these are likely vapour or chemical disposition machines,” notes Chew.

During the quarter, Micro-Mechanics also raised its interim distribution per share (DPS) by 20% to 6 cents, marking its second straight year of increase.

Over two years, interim DPS was raised by 50%.

Looking ahead, Chew notes that there are no negatives to the counter.

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Furthermore, high barriers to entry and the ongoing surge in semiconductor demand should provide runway of growth for the next two years.

“Management believes the industry is entering a multi-year supercycle of growth from skyrocketing demand for data centres, video streaming, remote work, 5G and automobile electrification.”

“High barriers to entry persist for Micro-Mechanics’ core rubber tip product. For instance, only a handful of suppliers can supply such high precision, customised and proprietary materials to customers,” he says.

As at 11.40am, shares in Micro-Mechanics are trading 2 cents lower or 0.6% down at $3.52, or 8.2 times according to PhillipCapital’s estimates.