Why the worst is not yet over for Micro Mechanics Holdings

Even as global semiconductor sales hit US$25.7b.

According to OCBC, recent data from the Semiconductor Industry Association pointed to an encouraging 2.0% YoY and MoM growth in worldwide semiconductor sales to US$25.7b for Nov 2012.

This was the highest monthly total for 2012 and also the first YoY revenue increase in 2012. OCBC believes that this momentum would carry through to 2013 andexpect Micro-Mechanics Holdings (MMH) to benefit from this expected gradual recovery in the semiconductor industry, although downside risks remain.

Here's more from OCBC:

For instance, Intel Corp., the world’s largest chip maker, reported a second consecutive quarter of YoY fall (3Q12: -5.5%; 4Q12: -3.0%) in its revenue last week. It only guided for a low single digit revenue growth in 2013, which we believe reflects a general sense of cautiousness in the industry.

We see a mixed segmental outlook for MMH in FY13, with positive growth in revenue and gross margin expected for its Semiconductor Tooling division.

However, we believe that prospects for its Custom Machining & Assembly division would remain challenging at least in the near term, as the semiconductor capital equipment market is still set for another year of sales decline before recovering in 2014, as highlighted in our tech sector strategy report on 21 Dec 2012.

MMH has paid out a consistent 3 S cents DPS from FY10 to FY12 and we believe that this trend could continue in FY13 and FY14, which translates into a yield of 7.0%.

This is premised on its minimal capex requirements (major capex already invested in FY11 and FY12) and healthy balance sheet.