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

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 net profit below expectations 

  • 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.


Demand remained robust … 

  • 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.


… but lack of skilled workers still creating a bottleneck 

  • 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.


Maintain ADD with lower Target Price 

  • 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
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.08 Down 0.110



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