Jadason Enterprises Limited - CIMB Research 2017-08-14: FY17F Earnings Likely To Be 2H Loaded

Jadason Enterprises Limited - CIMB Research 2017-08-14: 2Q17: FY17F Earnings Likely To Be 2H Loaded JADASON ENTERPRISES LTD J03.SI

Jadason Enterprises Limited - 2Q17: FY17F Earnings Likely To Be 2H Loaded

  • Jadason Enterprises Limited's 2Q17/1H17 net profit was only 11.2/15.4% of our FY17F but we deem it in line as we expect a strong 2H17F due to PCB drilling work for a key customer starting in Jul.
  • Net cash position strengthened to S$9.8m at end-Jun 17 from S$7.4m at end-Dec 16.
  • Maintain Add with TP of S$0.17. 
  • Key downside risk is slowdown of order momentum from its key customer.

2Q17 earnings deemed broadly in line

  • Although 2Q17/1H17 net profit was only 11.2/15.4% of our full-year forecast, we deem broadly in line as we expect a significant ramp-up in 2H17 earnings from its new business with a key customer gaining momentum.
  • 2Q17 revenue rose 42% yoy driven by revenue growth in the printed circuit board (PCB) drilling and equipment distribution businesses. At the operating profit level, the PCB drilling/equipment distribution segments reported operating profit of S$143,000/S$726,000 in 2Q17 vs. operating loss of S$255,000/S$773,000 in 2Q16.
  • Gross margin in 2Q17 was 21%. Cost of sales increased 32% yoy to S$12.2m due to the recognition of refurbishment costs for second-hand PCB drilling machines.

New PCB drilling work for key customer has commenced

  • Management shared that that it commenced new PCB drilling work for a key customer (Customer A) in Jul. We expect this to lead to continued revenue growth and higher gross margin for Jadason, as Customer A’s PCBs have a 60,000-hole count (Jadason drilling charges are on per hole basis).
  • The initial hiccups encountered in drilling the PCBs for this customer have been overcome and we expect order momentum to gather strength in 2H17F, as the end-customer of Customer A targets to launch its product before the Christmas season.

Balance sheet strengthened

  • Jadason’s balance sheet health improved in 2Q17, as its net cash position at end-Jun 17 was S$9.8m vs. S$7.4m at end-Dec 16. Its cash and bank balances stood at S$15.9m at end-Jun 17 compared to S$18.7m at end-Dec16.
  • Jadason pared its borrowings down from S$9.4m at end-Dec 16 to S$6.1m at end-Jun 17. We understand that management aims to lower the debt level further.

Key risk

  • Our FY17F net profit forecast of S$6.6m implies that Jadason will report S$5.6m net profit in 2H17. Based on our checks with Jadason and its discussions with Customer A and other long-term customers, we believe this projection remains sound.
  • Given the initial drilling hiccups for Customer A, we think 4Q17F will be the strongest quarter in FY17F for Jadason. Our S$5.6m net profit forecast for 2H17F may not be spread evenly over 3Q17F and 4Q17F.
  • The biggest risk to our Add call and earnings estimates is Jadason’s dependence on Customer A, which drives our 2H17F net profit forecasts.

Maintain Add

  • We project strong EPS CAGR projection of 68.6% for FY16-19F. 
  • We value Jadason at S$0.17, based on 12.34x P/E (+2 s.d. above average forward P/E during the last earnings recovery cycle in 2004-2007, when Jadason’s earnings accelerated significantly) applied to FY18F core EPS of S$0.0135.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-08-14
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.170 Same 0.170