Jadason Enterprises Limited - CIMB Research 2017-09-04: Snagged By The Humble Worker

Jadason Enterprises Limited - CIMB Research 2017-09-04: Snagged By The Humble Worker JADASON ENTERPRISES LTD J03.SI

Jadason Enterprises Limited - Snagged By The Humble Worker

  • We visited Jadason’s factories in Dongguan, China on 30 Aug 2017.
  • Production for its key customer is now in full swing.
  • However, unexpected difficulties in hiring workers and spare parts delay for the retrofitting of its second-hand machines is slowing down the company.
  • To be conservative, we cut our FY17-19 EPS forecasts as we believe the lack of workers will hamper its revenue run rate.
  • TP reduced to S$0.13, still based FY18F EPS of 12.34x (2 s.d. above the average forward P/E during the FY04-07 earnings recovery cycle).

Plant visit – 30 Aug 17 

  • We visited Jadason’s factories in Dongguan, China on 30 Aug 2017. 
  • The drilling of holes process for the printed circuit boards (PCBs) for its key PCB customer (Customer A) is now in full swing. 
  • Management estimated that the group has been able to deploy around 155 machines to drill the PCBs for all of its customers.

Turnaround intact – Expect stronger 2H17 

  • During the visit, we learnt that customer A’s PCBs are difficult to handle, requires higher precision during the drilling process and the customer needs a fast turnaround time. This is a positive for Jadason as the customer has tried but failed to find alternative drilling service providers that can meet its demands. 
  • We also understand that the customer has requested Jadason to perform a second drilling process on the boards. Given the larger number of hole counts on the PCB, this project will have a positive impact on gross profit.

Snag 1 - Difficulty in hiring workers 

  • Jadason currently employs around 600 machine operators on two shifts. Non-factory floor related employees have also been roped in to help in the production. 
  • Management highlighted that the company is facing difficulties in hiring workers despite offering relatively attractive wages. This is due to China’s economic transformation away from pure labour intensive activities as well as the better opportunities available to the second generation of Chinese workers post China’s opening up to the world. As early as Oct 2012, various news articles have highlighted the difficulty in hiring workers in China.
  • We believe the situation could worsen in 4Q17 as the workers gear up to return to their hometowns for the Lunar New Year festivities. Significant additions to its workforce may have to wait till around Feb 2018. 
  • To deal with the current shortage, management is: 
    1. deploying its office workers and engineers to help in the production and packing of the completed products; 
    2. offering relatively more attractive wages and benefits; 
    3. looking to employ/employing older workers who are less likely to job hop and can better appreciate the overall better remuneration package and working conditions at is factories compared to other factories in the same area.

Snag 2 – Delay in arrival of spare parts 

  • Another snag has been the delay in obtaining spare parts (needed to retrofit the secondhand drilling machines that Jadason has purchased) from suppliers. 
  • We understand from management that these parts could arrive before end-FY17 and an estimated 40 machines will be retrofitted. Although Jadason is keen to purchase second-hand drilling machines, progress has also been slow as the existing owners have been reluctant to sell and are asking for higher selling prices.

Share consolidation 

  • Jadason is still currently in the Minimum Trading Price (MTP) Watch-list of the SGX. The MTP criteria requires the company to have a volume weighted average price of not less than S$0.20 over the last six months and an average daily market capitalisation of not less than S$40m over the last six months.
  • Jadason has 36 months from 5 Jun 2017 to meet the MTP criteria, failing which the SGX will delist the company or suspend the trading of its shares with a view to delist the company.
  • To be prudent, Jadason has started deliberations and has sought advice on whether it should do a share consolidation as this would need approval from shareholders at its annual general meeting.

Forecasts Changes 

  • The lack of workers is creating an order backlog (three days or more) and will lead to lower recognisable revenue for 2H17. We assume that the spare parts issue can be resolved within FY17F, leaving our FY18 assumption of 190 machines in operation intact. An alternative (if the spare parts remain delayed) will be to transfer some machines from its Suzhou factory. 
  • The key variance to our forecasts is the company’s ability to expand its workforce. To be conservative, we have lowered our FY17-19 revenue expectations.
  • As at Jun 2017 Jadason’s accumulated losses stood at S$4.4m, mainly from its production operations in China. A capital reduction to eliminate the accumulated losses will need approval from the Chinese authorities. This is likely to take some time and the faster route could possibly be the elimination of these accumulated losses via profits to be generated over FY17-18, in our view. 
  • We believe Jadason intends to reward shareholders for their support over the difficult past five years (losses in FY12-15) where no dividends were declared. We believe any dividends for FY17F may have to be paid out of its existing cash balance and have cut our DPS assumption for FY17F to 0.1 Scts.
  • We also note that in the past 15 years, for the years that Jadason paid a dividend, the quantum has always been 0.5 Scts. Although we previously assumed a 50% payout ratio as earnings recover, our continued interaction with management has altered our view. 
  • We sense that management may err on the side of caution and conserve cash for possible M&As and to brace itself for the return of a challenging business environment. As such, we remove our 50% payout ratio assumption and now assume 0.5 Scts DPS for FY18-19F as our base case instead.

Maintain Add 

  • We cut our FY17-19 EPS forecasts to factor in the impact of the worker shortage.
  • Downside risks to FY18-19F earnings arise from the current uncertainty in the company’s ability to bulk up its workforce. 
  • Earnings catalyst will be the resolution of the worker shortage/spare parts issue. Jadason is confident of its FY17-19F outlook as customer A has a 3-year contract with its end-customer.

Valuation and Recommendation 

  • Due to the EPS changes arising from our lowered revenue assumptions, our TP for Jadason falls to S$0.13, still based on FY18F EPS of 12.34x (2 s.d. above the average forward P/E during the FY04-07 earnings recovery cycle)

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-09-04
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.13 Down 0.170