Larger-than-expected 3QFY09 loss. Micro-Mechanics (MMH) reported a 40.4% YoY decline (-39.0% QoQ) in its 3QFY09 revenue to S$5.5m, as the ongoing global financial turmoil and economic recession had led to an unprecedented drop in customer orders across all its worldwide manufacturing locations. This in turn resulted in the group suffering its first-ever quarterly loss of S$1.4m (3QFY08: S$2.1m profit, 2QFY09: S$171k profit). The biggest drag came mainly from its CMA (Custom Machining & Assembly) manufacturing plant in US, which accounted for ~67% of its operating loss in 3QFY09. For 9MFY09, however, MMH remained in the black with net profit of S$873k on revenue of S$26.1m. While we have always held to our view that MMH's profitability would be afflicted by the exceptionally harsh market conditions, and that the group is likely to sink into the red amid the shorter/slower quarter, the magnitude of the impact appears to be larger than expected. Notably, 9MFY09 revenue makes up 73.2% of our FY09 sales forecast, while the net income constitutes 72.8% of our earnings estimate.

Credit management, cost reduction measures paid off. Since the start of 2009, fortunately, MMH has embarked on various initiatives to structurally lower its cost base, including a combination of pay, benefits and working-hour reductions. These measures had helped the group to achieve cost savings of ~S$790k and alleviated its net loss in 3QFY09. On its operational front, we note that MMH has also been keeping a steady hand on its creditmanagement. As of 31 March 2009, only S$91k (or 2.6%) of its total trade receivables of S$3.5m was outstanding for >90 days, while its bad debt expenses for 9MFY09 was a minimal S$4.8k. If not for these proactive measures, MMH would not have been able to maintain its strong financial position, with cash balances of S$8.6m (S$10.1m as at end-2008) and no borrowings.

Maintain HOLD. While MMH has seen some improvements in orders in March, it is maintaining a cautious view on its 4QFY09 performance. On our side, we have also conservatively adjusted our FY09F earnings to reflect a possible loss for the fiscal year. However, as earnings and business activity is likely to remain uncertain and volatile, we are now switching our valuation to 0.8x FY10F NTA from 7x FY10F EPS. This pares our fair value to S$0.19 from S$0.24 previously. Nevertheless, we are keeping our HOLD rating on MMH as negatives seem to be priced in.