Jadason Enterprises Limited - CIMB Research 2017-07-04: Drilling Its Way Back To Profitability

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JADASON ENTERPRISES LTD J03.SI

Jadason Enterprises Limited - Drilling Its Way Back To Profitability

• Jadason is a leading PCB driller based mainly in Dongguan, China.
• Earnings turnaround in FY17F and growth in FY18-19F driven by an existing customer that won a 3-year supply contract from a leading mobile device brand.
• Room for gross margin surprise given the significant operating leverage in this business.
• Trading at 6.7x FY18F versus 48% earnings growth in FY18F. We project strong 210% yoy growth in net profit for FY17F.
• Recently initiated with an Add and target price of S$0.17.

Largest and most price-competitive PCB driller in Dongguan 

• Jadason is a leading PCB driller based mainly in Dongguan, China. The company also has a plant in Suzhou. Its main business is the drilling of PCBs as well as the distribution of PCB manufacturing equipment and PCB drilling machines. 
• Its role as a PCB equipment distributor allows Jadason access to the pulse of the industry and the ability to be cost-effective via repurchasing customers’ secondhand PCB drilling machines for refurbishment and addition to its own drilling capacity.

Has the share price peaked? 

• Year-to-date (YTD), Jadason’s share price has gained 375%, reaching a YTD high of S$0.089 on 11 May 17. The share price was largely unaffected by the recent tech stock sell-off on NASDAQ. We believe that the share price has yet to peak as 
  1. Jadason is trading at 9.9x/6.7x FY17/18F versus 210%/48% core EPS growth, and 
  2. dividend payment is likely to resume in FY17F as the company has staged a significant earnings recovery. 

As of 4-Jul-2017, Jadason's share price has gained 400%, reaching YTD high of $0.10.

Share price driver #1: Could FY17 earnings surprise? 

• Earnings surprise could come from 2 sources: 
  1. stronger-than-forecast orders from a major customer, and 
  2. major gross margin expansion as Jadason’s production equipment was significantly impaired in FY15, leading to lower depreciation charges. 
• At the same time, there is considerable operating leverage in this business. Based on our channel checks, drilling for this major customer already started in the first week of July.

Share price driver #2: M&As 

• Jadason has a strong net cash balance sheet. We understand that management is keen to pare down its bank borrowings further and raise its net cash balance. 
• Other than the resumption of dividends in FY17F, it could also use its cash balance for M&As to diversify the business.

Share price driver #3: Dividends 

• Although Jadason does not offer any formal dividend guidance, we noted that, in the past, Jadason Enterprises paid 0.50 Scts DPS when operations were profitable. We believe dividend payments will resume in FY17F given our expectations of a return in profitability.
• We believe Jadason will temper dividend payments given the need to grow another revenue stream to diversify its business.

Recently initiated with an Add 

• We recently initiated coverage on Jadason (Report: Jadason Enterprises Limited - Good Times Are Here Again). Given our strong EPS CAGR projection of 68.6% for FY16-19F, we value Jadason at S$0.17. This is based on 12.34x P/E (+2 s.d. from average forward P/E during the last earnings recovery cycle in 2004-2007, when Jadason’s earnings accelerated significantly) applied to our FY18F core EPS estimate of S$0.013. 
• The key risks are order pullback or delays by customers.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-07-04

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