1 Risk About Micro-Mechanics (Holdings) Ltd You Should Know Of
Micro-Mechanics (Holdings) Ltd (SGX: 5DD), which was founded in 1983, designs, manufactures, and markets high precision parts and tools that are used in the semiconductor industry.
In a previous article of mine, I looked at the revenue breakdown of Micro-Mechanics according to geography. Most of the company’s revenue in FY2018 (the financial year ended 30 June 2018) came from China, the US, and Malaysia. A total of six countries contributed to nearly 90% of the firm’s business for the year.
As it is with any company, there are bound to be risks, and Micro-Mechanics is no exception. There is one risk that I think investors should know about.
In FY2018, nine major customers contributed 29% of Micro-Mechanics’ total revenue of S$65.1 million. The company classifies a major customer as one that provides more than 10% of revenue from each segmental region. The following table shows the revenue contributions by major customers and the number of major customers by region:
Source: Micro-Mechanics FY2018 annual report
For instance, Malaysia had one major customer contributing S$1.7 million of the country’s revenue of S$12.1 million for FY2018. So, that one customer was 14% of Micro-Mechanics’ Malaysia revenue. As for the company’s largest geographical market, China, the country’s one major customer contributed to about 15% of the country’s revenue.
In my opinion, having just nine customers contribute to 29% — or S$19.0 million — of Micro-Mechanics’ total revenue in FY2018 brings customer concentration. If any one of the nine customers decide to part ways with Micro-Mechanics for any reason, the company’s top-line could be hurt.
The Foolish takeaway
Micro-Mechanics has given investors a total return of a whopping 1,412% from its listing in 2003 till today. However, there is one risk with the company that investors should take note of, and that is customer concentration. I’ll be keeping a keen eye on how Micro-Mechanics’ customer-revenue mix changes in the years ahead to ensure the risk does not flare up.