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Why buy Micro Mechanics?




Started in 1983, Micromechanics design and manufactures high
precision parts and tools used in testing and assembly of semiconductors, mainly
focused in die attach, wire bonding and encapsulation. 
The business can be broken down to 2 main segments:
Semiconductor Tooling and Custom Machining and Assembly (CMA). As the former
accounts for 85% group revenue (average Yr 2012- Yr 2016), it’s overall
earnings can be quite dependant on the outlook of the semiconductor industry. 
It forms the bulk of the revenue which does designing and
manufacturing equipment used for semiconductor device fabrication, mainly
focused in die attach, wire bonding and encapsulation.
1. Die Attach is the process of attaching the silicon die of a
semiconductor device to substrate and it requires various precision tools to
carry out. This video illustrates it well: https://www.youtube.com/watch?v=1U0-Km305zM
Hence Micro-Mechanics manufactures die attach tools
used to mount a die to a substrate. For instance, they design different sizes
of rubber tips (pick up tool) which is used for the die attach process to
handle the die.  Products include rubber
tips, high temperature plastic tools, dispense Nozzle and Epoxy Stamping Tools.
2. Wire Bonding is the method of making interconnections
between the die and the substrate. The tools manufactured are wire clamps and
3. Encapsulation is also known as integrated circuit packaging.
It’s the final Stages of semiconductor wafer fabrication, where the
semiconductor material is covered with a case to protect against mechanical
effects and corrosion. Hence, the tools manufactured such as dispensing nozzle is
used to for flip chip underfill and package encapsulation applications.
 Currently, their main
bulk of earnings comes from 6 countries: China, Malaysia, USA, Taiwan,
Philippines and Singapore.

It stands for Custom Manufacturing & Assembly which manufactured
precision tools and equipment on a contract basis tier one companies in
aerospace, medical, instrumentation, and water fabrication industries.
It operates under Micro-Mechanics Inc (MMUS) and in 2008, it bought
over assets of AMP3 i.e equipment, inventory and intellectual property from AMP
III LLC for USD1.85mil (SGD2.52mil) so they could manufacture precision
components for wider range of industries such as medical, aircraft, bioscience
and semiconductor.
This division started in Malaysia, Penang with the intention to grow a
business that goes beyond semiconductor. It has been undergoing a stable growth
through organically-driven initiatives which contributes total of 10% of total
revenue. Hence the purpose of this acquisition is to accelerate the growth of
this division through access to new skills.  
As of Yr 2015, it has yet to make a profit and reported a
loss of $1.05mil and $1.7mil in 2016. Their main sales market is to the USA and
hence the recent strengthening of US dollar against SGD will have a positive
impact on revenue and earnings. 
These years, there have been efforts to build a separate
plant to construct a separate CMA division for manufacturing parts for
equipment makers in semiconductor, aerospace, laser and other high
technology.  Moving forward, they will
cease diversification attempt and focus on semiconductor/water fabrication
industry after considering the investment and engineering requirements.

As 85% of it’s revenue is generated from semiconductor, it’s
important to look at the Semiconductor forecasts to have a better idea of its
outlook. The below chart is extracted from http://www.wsts.org/
and it seems to suggest an uptrend since it’s downfall in
mid-2016. As it has no debt and generates FCF I am happy if they can just
maintain the earnings. 

Simple Business
One of the Berkshire Hathaway acquisition criteria is a
business that is simple and easy to understand. For instance, Warren Buffett’s
$28b acquisition of Heinz in 2012 tells a lot about his investing habits: plain
and simple like ketchup. 
Likewise, I personally find Micro Mechanics’ business
easy to understand and they do not have much subsidiaries and they are very
focused on what they are good at.
As I m buying this purely for dividends, and growing
dividends, I will be focusing more on the cashflow.

Let’s dive into the numbers…

Dividends paid/share


I have extracted the numbers from the annual report 2011 to
2015 and it shows that they have been consistently generating free cashflow
which is more than adequate to pay dividends. Even in times when there’s a
softer demand for semiconductor 2015 and 2016, they even managed to grow their free cashflow.
Like SATS, they have been dealing with cost pressures
effectively over the past 3 years despite rising slowing growth and rising
manpower costs, resulting higher FCF.


Good ROE with no
More than just a net cash company, they have no debt. So
there are not much affected by the rising interest rate environment.
They also consistently exceed ROE of 10% for the past 5
years and growing. There was a decline in last year’s net profit partly due to
currency losses in depreciation of Ringgit and Renminbi, as both markets
accounted for 50% of the sales. However, the ROE calculation was based on profit
for the year/Total Equity instead of the Comprehensive income. So the decline
in ROE is much attributed to the softer demand in semiconductor industry. As I am buying this for dividends, I won’t set expectations on their growth.

High Dividend
A dividend policy was established in 2015, which is to
distribute 40% of the audited net profit. Assuming earnings stays the same for
2017, expected dividends would be $11,883,409*0.4/$139,331,081= $0.034/share
Dividend yield= $0.034/$1.035= 3.3%
However, based on past years they have been generously paying
57.8% and 70.2%, of the net profit, and with FCF of $0.09/share in 2016, I am
hoping for a 5% yield at price of $1.035.

Points to Note
Currency Risks- As 94% of the revenue is derived from overseas,
it faces foreign exchange risk if SGD continue to strengthen. If the ringgit
continues to weaken against SGD, it will continue to impact the earnings as
Malaysia market accounts for 21% of sales. On the positive side, the
strengthening of USD could soften the impact of foreign exchange loss. 
Cyclical- If there is only one take away for semiconductor
investors, it is that semiconductor industry is highly cyclical. The sales is
dependent on end-product demands such as laptops, mobile phones. On a positive
note, it is comforting to note that in bad times market will turn at some point
for the better as it’s not a sunset industry.
Vested with 5000 shares at $1.035 as of writing.

p/s I read from some analyst reports that they have a wide clientele base with major chip manufacturers/assembly and test companies such as Texas and Intel. It would be a plus point for Micro Mechanics but I couldn’t find this information in the website or annual reports.


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