Jadason Enterprises Limited - CIMB Research 2017-11-10: Workers Still Needed

JADASON ENTERPRISES LTD J03.SI

Jadason Enterprises Limited - Workers Still Needed

We deem 3Q17/9M17 net profit below, at 26%/51% of our FY17F estimate. We were expecting greater 3Q17 profit from higher-margin manufacturing activities.
Jadason's balance sheet remains net cash and bank borrowings were further reduced to S$2.5m at end-Sep 17 from S$6.1m at end-Jun 17.
Demand and forecast from its major customer remained strong in 3Q17 but Jadason continues to experience difficulty in hiring production workers.

We cut net profit for FY17-19F by 13-17% as we reduce gross margin assumptions for a higher wage bill due to overtime costs until labour woes are resolved.
Rolling over valuation basis to FY19F, our TP dips to S$0.11, still based on 12.34x P/E (2 s.d. above average forward P/E during the FY04-07 earnings recovery cycle).

We deem 3Q17 and 9M17 revenue in line at 28% and 73% of our FY17F estimate. However, we consider 3Q17 and 9M17 net profit below expectations at 26% and 51% of our full-year expectations. We were projecting better profitability from higher-margin products, which did not materialise.
Gross profit margin fell to 19.05% in 3Q17 from 26.83% in 3Q16. 3Q17 earnings benefited from an exchange gain of S$0.2m, lower interest cost and the absence of associate losses.

3Q17 earnings performance would have been better if Jadason had not suffered from a lack of workers, an issue that we highlighted when we visited the company’s factories in China in Aug 17. The decline in gross margin was due to higher cost of sales arising from:
1. one-time refurbishment charges to upgrade second-hand production machinery, and
2. higher overtime pay for its workers due to the labour shortage in China.

The company’s balance sheet remains strong. As at end–Sep 17, Jadason reduced its bank borrowings to S$2.5m, down S$3.6m from the S$6.1m debt position at end Jun-17.
Net cash per share at end Sep-17 was 0.75 Scts. Current ratio at end Sep-17 was 2.76x and the quick ratio was 2.37x.

Jadason guided that the distribution business continued to face challenges as customers remained cautious with capital expenditure.
In the manufacturing business, the company believes 4Q17F will see good demand from customers. However, it still faces the challenge of finding workers. Jadason has expanded its recruiting efforts to include mature workers.
The company remains concerned about the sufficiency of its labour force, especially for 1Q18F as the Chinese New Year holidays loom.

We lower FY17-19F core EPS by 13-17% as we moderate our gross margin assumptions, given the impact of higher overtime pay. We also roll over our valuation basis to FY19F.
Still based on an unchanged 12.34x P/E multiple (2 s.d. above the average forward P/E during the FY04-07 earnings recovery cycle), our target price dips to S$0.11. Maintain Add.
A downside risk is worsening of the labour situation due to worker fatigue as its workforce has been consistently clocking overtime work.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-11-10

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