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Friday, 3 August 2007

Manufacturing Integration Technology 2H results on 3rd Aug 2007


Electronics sector in Singapore had been in the doldrums for the first half 2007. So it is nothing really surprising if Manufacturing Integration Technology (MITech) also turn up lacklustre results.

But I didn't expect it actually turn out an eye-popping 86% drop in earnings!

A closer look at the results

Due to the relatively high overhead common to all manufacturing companies, a drop in revenue of 47% led to a plunge in profit of 86%. This translated into a profit margin of only 3.6% this half, 1H 2007, compared to 13.9% last year.

The drop in margin is not merely due to high overheads. The fact that various variable cost segments, e.g. cost of sales, selling and distribution expenses did not fall inline with revenue shows that the company also face profit margin squeeze.

The bad

Despite poorer earnings, MITech still declare dividend of 0.25 cent . Last year, they declared 0.5 cents in 1H 2006 but that was supported by earnings of 4.3M, against this half's meagre 0.59M. They are simply paying too much. The money can be put into better use to grow the company. Dividend should always be inline with company earnings. To distribute the fruits during bumper harvest and not waste money during bad times.

The good (potentially)

Going forward, there are reasons to be optimistic about company performance in 2H 2007 and beyond.

1) Expected picked up in the electronics sector in 2H 2007 in general (Singapore's semiconductor growth in June 2007 already picked up strongly). Hopefully, MITech have something to gain from this rebound.

2) Their recent acquisition in RISE (Right Industrial Systems Engineering Pte Ltd) in February 2007 and AMS Biomedical in May 2007 should contribute strongly to its earnings in 2008 and beyond. The acqusitions of RISE in fact came with profit guarantee for 2007 and 2008.

Short term outlook

I expect MITech's earnings to plunge further in 2H 2007 and a strong rebound in 1H 2008, due to the poor 1H 2007.

Long term outlook

There are no competitive advantage that MITech possess as far as its business in the traditionally cyclical and cut throat competitive semiconductor, precision engineering and contract manufacturing are concerned.

However, there are 2 reasonas why I still think it has a positive long term outlook.

1) It is one of the few companies with a net cash position (NIL debt). Thus if it can manage its resources well so as to be one of the most efficient manufacturer, the future will still be bright.

2) With its solid cash horde, it has the capability to diversify its revenue stream away from the notoriously cyclical semiconductor business. The recent acquisitions of RISE and AMS Biomedical provide the needed evidence. These are manufacturing businesses, in line with the core business of MITech. Given MITech's experience and knowledge in this line of business, I trust MITech that the acquisitions are sound and in their best interest. The last thing any company can do to destroy investor confidence is ill conceived diversification via irrelevant acquisitions and merger.

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