The Returns At Micro-Mechanics (Holdings) (SGX:5DD) Aren't Growing: A Closer Look at the Semiconductor Industry's Impact

Micro-Mechanics (Holdings) Ltd (SGX:5DD) has been facing a challenging time in recent years, with the semiconductor industry's cyclical nature significantly impacting its financial performance. The company, which designs, manufactures, and markets consumable parts and precision tools used to assemble and test semiconductors, has experienced a decline in revenue and net profits due to the global semiconductor industry slowdown in 2022 and the subsequent downturn in demand.

In 2022, Micro-Mechanics' revenue dropped from a high of S$82.5 million to S$67.0 million in 2023, leading to a sharp decline in net profits from S$19.8 million to S$9.8 million. The latest financial year (FY) 2024 saw further declines, with revenue and net profit dropping by 13.6% and 17.7% year-on-year to S$57.9 million and S$8.0 million, respectively. This significant decline in revenue led to underabsorption of costs, as the company's cost structure is largely fixed in nature (AGM 2023 Presentation Slide 13).

The company's capacity utilization rate has also decreased from 61% in 2022 to 54% in 2023 and 44% in 2024, indicating a lower demand for its products. This decline in revenue and capacity utilization has negatively impacted Micro-Mechanics' gross profit margin, which has dropped from 57% in 2017 to 47% in the latest two years.

Foreign exchange fluctuations have also played a role in Micro-Mechanics' profitability, with an increase in net finance costs attributed to currency fluctuations. This increase in net finance costs has affected the company's profitability.

To improve its financial performance, Micro-Mechanics has implemented several strategies, including the "Five-Star Factory" initiative, which focuses on enhancing efficiency and quality across its manufacturing plants. The company has also been effective in managing its costs, leading to consistent margin expansion. In the first quarter of FY2025, the company's gross profit margin increased to 50.7%, up from 48.8% in the previous year. This improvement, along with better cost management, has led to a 10.7% improvement in operating profit and a 14.0% increase in net profit to S$3.1 million YoY.

However, despite these efforts, the semiconductor industry's cyclical nature continues to pose challenges for Micro-Mechanics. The company's financial performance remains tied closely to semiconductor industry trends, which are susceptible to economic and geopolitical shifts. As a result, investors may want to closely monitor the company's progress and the broader semiconductor industry trends to make informed investment decisions.

In conclusion, the returns at Micro-Mechanics (Holdings) (SGX:5DD) have not been growing due to the semiconductor industry's cyclical nature and the company's fixed cost structure. While Micro-Mechanics has implemented strategies to improve its financial performance, the company's future growth will depend on the semiconductor industry's recovery and its ability to adapt to changing market conditions.