JADASON ENTERPRISES LTD
J03.SI
Jadason Enterprises - A Gem With An Explosive NPAT Growth
- We initiate coverage on Jadason with a BUY recommendation and DCF- based TP of SGD0.15 (103% upside).
- As a PCB drilling and mass lamination service provider, it is a key proxy to the uptrend in the semiconductor space. The company has even expanded its customer base as well as product mix, with growing demand from existing and new customers.
- Moreover, it has also secured a new major U.S smartphone project via an existing customer in its lucrative drilling and manufacturing division. This would bump its segment revenue by 30% for the new product launch slated for 2H17.
- Following a turnaround in FY16, we expect it to enjoy bumper profits in FY17F-18F.
Company Background
- With its humble beginnings dating back to 1980, Jadason is now one of Asia’s leading supplier for equipment and supplies to the PCB industry.
- With a distribution network spanning across Greater China, Japan, Malaysia, Singapore and Thailand, Jadason is able to support the sale of equipment and provide service to its international clients.
- In addition, Jadason also provides PCB drilling and mass lamination services through a subsidiary company in Dongguan.
Business Segments
Equipment and supplies
- Jadason provides capital equipment and supplies to PCB companies mainly situated in Singapore and Greater China. For 2016, revenue from equipment and supplies segment contributed 40% to the group’s total revenues, down 34% YoY due to the continued weakness in demand for capital equipment.
- Distributing capital equipment remains an important core business of the group. It seeks to remain relevant and competitive through technology collaboration with business partners. It is also a distributor of Hitachi drilling machines.
Manufacturing and support services
- Jadason has successfully moved up the value chain, into PCB drilling and lamination with attempts to provide more value added services to its customers. Through a China-based subsidiary, Jadason provides high quality and reliable PCB drilling and mass lamination services.
- High reliability and quality is required to ensure that the circuit boards are not damaged during the drilling process.
Investment Merits
Trading at just 5x FY17F ex-cash P/E with FY16-19F NPAT CAGR of 79%.
- With the re-rating across the semiconductor industry, especially in Singapore, Jadason is trading at an undemanding valuation of just 5x FY17F ex-cash P/E. This is way below its local peer average of 12.2x.
- With a turnaround now validated, coupled with the positive sector outlook and its growth plans, we are confident of the bumper years ahead and expect a FY16-19F NPAT CAGR of 70%. This is also accompanied by an attractive dividend yield of an estimated 9.6% for FY17F.
- Our DCF-backed TP of SGD0.15 implies a reasonable 12x FY18F P/E, in line with peers.
New mobile project secured to fuel bumper growth.
- Through an existing customer, Jadason has secured a new project for the next three years involving a leading smartphone player in the U.S, in its lucrative drilling and manufacturing division. This new model of this US smartphone – targeted for launch in 2H17 – would likely require at least 40,000 to 100,000 holes in a PCB board.
- We think that this would raise its drilling segment revenue by 20-30% pa over the next two to three years, resulting in its NPAT to grow significantly for FY17F and FY18F.
Lucrative manufacturing and support services margins.
- Previously, Jadason was required to do material sourcing for its customers and as a result, it suffered the risk of forex as well as a change in material costs. It has since revamped its business model.
- Currently, it just provides drilling and lamination services for its customers. Thus, its gross margins for this segment are highly lucrative, at about 40% and above. This has also resulted in its margins improving over the years despite a drop in revenue, which was mainly from material costs.
Change in product mix, automation and higher utilisation improve margins.
- As technology advances, the number of holes required in a PCB also increases. This in turn allows Jadason to use the same machines to drill more holes with the same precision. Therefore, its margins are likely to also increase with more holes in a PCB.
- Previously, the company was doing PCBs with 10,000 holes and below. Currently, it has customers in the mobile and automotive segments that require 20,000-100,000 holes and 5,000-20,000 holes in a PCB respectively.
- Automation has also been implemented in some of its processes to reduce some of its labour costs and improve overall margins.
- In addition, an average 150 of its 190 machines are currently being used as compared to just 40-120 machines last year, with the remaining machines earmarked for the new project in 2H17. This is in line with the electricity usage in the factory, which has been risen in tandem with the increased utilisation. The current electrical usage is as high as that of 4Q16.
Strong balance sheet with 40% of market cap made of net cash.
- Jadason has been paring down its debt aggressively with its current figure standing at only SGD7.6m as at end-2016 from SGD23.2m in 2014. Despite that, it still has a net cash position of over SGD18m, representing more than 40% of its current market cap.
- Going forward, it is likely to generate more cash as its revenue ought to continue to surge. This would occur through the rise in demand from existing and new customers, as well as low capex needed only for the maintenance and additional old machines.
- Management stated that the company would refurbish the old machines for its own use at a much lower cost compared to a new machine.
Positives abound.
- Management has highlighted that it is keen to reward shareholders if the company performs well. It has already approved the share buyback mandate in its AGM in Apr 2017. As a result, we do expect the share buyback programme to be carried out soon.
- In the past, management rewarded shareholders when it was profitable, with dividends of SGD0.005 per share, representing an attractive yield of 8%. If Jadason performs to our expectations this year, we feel that a yield of between 8-10% is highly possible as it has a strong balance sheet to do so and with the profits generated, it would be more than enough to sustain such a dividend payout without decreasing its SGD26m cash hoard.
Increasing demand for PCBs.
- Technavio forecasts that the global PCB market would grow at a CAGR of around 3% by 2020, mainly driven by the increasing demand and interest in the IoT equipment, automotive and smartphone industries. As consumers and enterprises seek “digitisation”, PCBs are required to be lighter, smaller and more complex to keep up with the rapid technological changes. Technavio highlighted that the market is highly fragmented with the presence of multiple manufacturers and buyers. Vendors’ growth strategies usually involve acquiring smaller vendors, enabling them to immediately boost market share.
- The increasing IoT objective brings about a higher demand for microcontrollers, sensors and memory. We believe it is positive for the semiconductor industry and would increase the demand of PCBs and likely be beneficial to Jadason, which provides drilling and lamination services. An increase demand in PCBs would likely result in an increase in the services that it provides.
Valuation
Initiating coverage with a BUY and TP of SGD0.15
- DCF-derived TP of SGD0.15 with a WACC of 10%. We initiate coverage on Jadason with a BUY recommendation and DCF-based TP of SGD0.15.
- Our assumptions are listed below:
- Risk-free rate of 2.3% from the 10-year average yield of the 10-year Singapore Government bonds;
- Expected market return of 10%, based on Bloomberg’s 10-year average return of the Singapore market;
- Beta of 1;
- Terminal growth rate of 0%
Peer comparison: Significantly undervalued against its peers.
- With a significant explosive NPAT growth ahead, Jadason is trading at a significant discount against peers; ie at only a 2017F P/E of only 7.8x, compared to average P/E of 12.2x for local peers.
- In addition, more than 40% of its balance sheet is made up of net cash. Its dividend yield this year would also likely be much better than peer average of 3.4%.
- Our TP of SGD0.15 implies a FY18F P/E of 12x.
Key Risks
Over-reliance on PCB and semiconductor industry
- Despite successfully expanding up the value chain, Jadason is still highly reliant on the PCB and semiconductor industries, which are highly cyclical in nature.
- Jadason’s profitability would be affected during the downturns and may even require a sufficient cash position to tide through thereby limiting its M&A growth capabilities.
Key customer risk.
- As its earnings growth would mainly be derived from a new smartphone project, the reception towards that smartphone and the sales would be vital to the project’s continuation as well as the earnings for Jadason.
Technological changes
- The electronics industry is highly susceptible to new technological disruptions that that may render the current technology and inventory obsolete.
- Jadason has to stay at the frontline of change and technological advances to stay relevant and profitable, lest it loses its competitive advantage and long standing partnerships.
Delisting risk
- Jadason entered SGX’s watch list for failing to meet the minimum trading price of at least SGD0.20 in 2015.
- Jadason has since filed for an extension and is awaiting approval. However, given the company’s net cash position, of SGD18m, as well as the recent profitability growth, the risk of delisting is low.
Labour shortage and increasing manpower cost in China
- In 2013, the group faced manpower issues, highlighting the fact that it was unable to retain workers due to the rapid urbanisation and economic development in inland China, lack of affordable housing in coastal China and unwillingness of young workers to settle for factory work.
- These factors posed a significant operational risk as productivity dropped during that period and Jadason had to decline orders from its customers.
Jarick Seet
RHB Invest
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http://www.rhbinvest.com.sg/
2017-05-08
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