Semiconductor segment likely to drive growth in 4QFY09. Micro- Mechanics (MMH) is due to report its FY09 results towards the end of August. Having registered a 40.4% YoY decline (-39.0% QoQ) in revenue amid a dismal 3QFY09, we now expect the group to post a slight recovery in its revenue and narrower loss in the upcoming 4QFY09 results. We believe this improvement is likely to be driven by an upturn in demand in the semiconductor industry, which has over the past few months showed relatively positive results. Worldwide semiconductor revenue, for example, had reached US$17.2b in June 2009, a growth of 3.7% from May, making it the fourth consecutive month of sales growth, according to the Semiconductor Industry Association (SIA). As such, we are expecting the positive news to flow through to its semiconductor tooling segment as well.

CMA segment expected to be soft still. The surge in semiconductor demand, however, is likely to be partially offset by continued weakness in its Custom Machining and Assembly (CMA) segment, based on our channel checks within the capital equipment industry. For FY09, we expect MMH to post a 16.6% decline in revenue to S$31.9m and to swing into a net loss of S$0.4m (S$8.9m profit in FY08). This represents an expected 41.1% YoY decline (+5.5% QoQ) in its 4Q09 revenue to S$5.9m and a loss of S$1.3m (4QFY08: S$1.7m, 3QFY09: S$1.4m).

Sustainable recovery may be in sight. Looking ahead, while an annual decline in sales is inevitable for the current fiscal year, we think that a sustainable recovery may be in sight for MMH. According to SIA, the recent global semiconductor sales suggest that the industry is seeing a gradual recovery in demand and that it is returning to normal seasonal growth patterns. For 2010, industry watchers have almost unanimously projected resumption in growth for the semiconductor industry (e.g. 13.1% growth by iSuppli). Within the semiconductor equipment market, SEMI is also expecting it to rebound in 2010, with an annual growth of 47%.

Maintain HOLD. Pending the full year results, we are keeping our forecasts intact. However, we now raise our fair value from S$0.19 to S$0.35 based on a higher valuation metric of 1.5x FY10F NTA (0.8x previously), in line with the re-rating of the semiconductor industry. At current price, maintain HOLD.