Jadason Enterprises - RHB Invest 2017-08-16: Strong 2H17F Awaits

JADASON ENTERPRISES LTD J03.SI

Jadason Enterprises - Strong 2H17F Awaits

Jadason reported a strong set of 2Q17 results, with revenue up 42% YoY and NPAT turnaround from a loss of SGD1.19m in 2Q16 to a profitable SGD0.74m in 2Q17.
Going forward, management has indicated that its highly profitable manufacturing and support services segment is likely to do well in 2H17F, as its long term customers have indicated their intention to increase their production capacities.

We expect this to bump its segment revenue by 30% and expect it to enjoy bumper profits in FY17F- 18F.
Maintain BUY with a DCF-based TP of SGD0.15 (36% upside).

Jadason Enterprises (Jadason) was previously required to source material for its customers and as a result, it suffered forex risk as well as a change in material costs. It has since revamped its business model and now just provides drilling and lamination services for its customers. With that, its gross margins for this segment have become highly lucrative, about 40% and above.
Overall, its margins have been improving over the years despite a drop in revenue, as they were mainly from material costs.

As technology advances, the number of holes required in a printed circuit board (PCB) increases. As it is able to use the same machines to drill more holes with the same precision, the company’s margins would also increase with more holes in a PCB.
Previously, it was doing PCBs with 10,000 holes and below. Currently, it has customers in the mobile and automotive segments that require 5,000- 20,000 holes and 20,000-100,000 holes in a PCB respectively.

Through an existing customer, it is likely to secure a new project for the next three years that involves a leading smartphone player in the US. This would be in its lucrative drilling and manufacturing division. This new model of this US smartphone – targeted to launch in 2H17F – would likely require at least 40,000 holes in a PCB.
We think that this would cause its drilling segment revenue to rise by 20-30% pa over the next two to three years, resulting in its NPAT growing significantly for FY17F and FY18F.

As at 2Q17, Jadason had a strong balance sheet with a net cash position of SGD15.2m. In our discussions with management yesterday, it shared that it is keen to reward shareholders and would likely give dividends this year if it performs well.
Due to the low capex requirement, we expect it to continue generating a positive cash flow, and potentially distribute an attractive dividend yield of 6.5% for FY17F.
In addition, its share buyback mandate was approved at its AGM in Apr 2017.

Going forward, management has indicated that its highly profitable manufacturing and support services segment would likely do very well in 2H17F as its long term customers have indicated their intention to increase their production capacities.
All in all, we expect this segment’s revenue to improve by 30% and enjoy bumper profits in FY17F-18F.
Maintain BUY with a DCF-based TP of SGD0.15.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2017-08-16

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