Jadason Enterprises Limited - CIMB Research 2018-03-06: Workers Hold The Key To Better Profitability

JADASON ENTERPRISES LTD J03.SI

Jadason Enterprises Limited - Workers Hold The Key To Better Profitability

Jadason Enterprises' 4Q17/FY17 net profit was below expectations at 23%/82% of our FY17F estimate.
Balance sheet remained net cash and borrowings were reduced to S$3.2m as at endDec 17 from S$9.4m at end-Dec 16.
Demand and forecasts from its major customer remained strong in 4Q17 but Jadason still experienced difficulty hiring production workers.
We cut net profit for FY18-19F by 36-47% as we reduced gross margin assumptions given a higher wage bill due to overtime costs until its labour woes are resolved.

Our Target Price falls to S$0.08 due to our lower forecasts, still based on 12.34x CY19F P/E (2 s.d. above its average forward P/E during the FY04-07 earnings recovery cycle).

4Q17 and FY17 revenue were in line with our expectations at 26% and 99% of our FY17F estimate, respectively. However, 4Q17 and FY17 net profit were below expectations at 23% and 82% of our full-year estimate, respectively, as the gross profit margin was eroded by higher material and wage costs.
Jadason also benefited from an exchange gain of S$1.1m. FY17 net profit would have been S$1.7m if we excluded the foreign exchange gain.
No dividend was declared for FY17.

In FY17, demand for PCB drilling was strong and Jadason still anticipated strong demand from customers in FY18. The development of a 5G mobile network in China should provide further business opportunities for Jadason.
In the equipment distribution business, the company expects the environment to remain challenging as PCB manufacturers are still cautious in terms of capital expenditure.

Jadason continues to face challenges hiring more skilled workers to fulfill its production requirements. At the same time, high workforce turnover compounds the issue.
Management estimates that an additional 400 workers are needed to fulfill its production needs.
To deal with the labour shortage, Jadason has turned away lower-margin drilling jobs.

We lower FY18-19F core EPS by 36-47% as we moderate our gross margin assumptions due to the impact of higher wages and lack of skilled workers. We introduce FY20 forecasts.
Our Target Price is 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) but dips to S$0.08.
A downside risk is the worsening of the labour situation.
Upside risks to our call could come from Jadason hiring more skilled workers.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2018-03-06

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