Below expectations. Micro-Mechanics (MMH) delivered a weak set of 2QFY09 results, with revenue dipping 7.5% YoY (-23.3% QoQ) to S$9.0m, and net income plunging 93.3% YoY (-91.9% QoQ) to S$0.2m, due to an unprecedented fall in customer orders across its manufacturing locations.

Sales within its semicon segment fell 28.8% YoY (-22.1% QoQ) amid a severe slowdown in the global semicon industry. Its Custom Machining & Assembly (CMA) segment, while posting a supernormal growth of 266.1% YoY following the acquisition of assets from US-based AMP3 in FY08, sank 26.0% QoQ after succumbing to rapidly diminishing customer demand.

Gross margin for the semicon segment stayed healthy at 54.8% over the quarter, while that for its CMA segment fell significantly to -9.4% due to high fixed costs and low utilization rate. For 1H09, the group chalked up sales of S$20.7m (+7.3% YoY, +8.9% HoH), meeting 56.1% of our FY09 revenue forecast, but posted a significantly smaller profit of S$2.3m (-54.8% YoY, -40.2% HoH), or 39.6% of our full-year estimate. MMH ended the fiscal period by declaring an interim dividend of 1 S cent/share, in line with our expectations.

Strategies taken to lower costs. In view of the gloomy macroeconomic and industry backdrop, the group plans to step up its efforts to structurally lower its cost base and improve its operational efficiency. Among these, MMH will be 1) reducing its personnel costs through headcount and salary reductions, 2) exploring various avenues to reduce overhead costs and 3) accelerating the transfer of CMA technology from its US plant to Penang plant to improve its cost-competitiveness. These actions are expected to bring about savings of at least S$0.9m for 2HFY09. To maintain a strong financial position, it is also limiting its FY09 capex to S$2.0m (excluding investment in IT integration program).

Reiterate HOLD. While MMH is likely to achieve a leaner cost structure from its cost reduction measures, we believe that the group's profitability would be afflicted by the exceptionally harsh market conditions. In 3QFY09, particularly, we are expecting the group to sink into the red amid the shorter/ slower quarter (due to Chinese New Year). In light of this, we again ease our FY09 forecasts by approximately 3-79%. As MMH enters into 3QFY09, we now roll over our valuation to FY10, deriving a fair value estimate of S$0.24 (S$0.31 previously), based on 7x FY10F EPS. Maintain HOLD on MMH as negatives appear to be priced in.