SGX Stock Targets :: Your One Stop Analyst Reports Blog

Segment margins affected by product mix. While 1H07 Manufacturing and Support Services sales came in marginally weaker at $26.9m, operating margin fell to 13% from 31% in 1H06. The sharp decline in margin was due to changes in product mix which saw Jadason producing less of its higher margined handset PCB. Management estimates handset PCB to be c20% of its drilling product mix in 1H07 vs. 70% in 1H06. There is also no evidence of improvement in the drilling product mix, which is overly skewed towards lower margined computer, car, LCD TV PCBs. Equipment and supplies sales declined 14% to $87.6m due to lower equipment sales whilst its operating profit margin improved slightly to 5% due to lower SG&A expenses and lower provision for variable incentive bonus in 2Q07. Overall group operating margin fell to 7% vs. 10% in the previous corresponding period.

Capacity expansion may be a double edged sword. Management will continue its planned expansion of 45 mechanical drilling machines by August; up to this juncture, the company has installed 30 new mechanical drilling machines of the planned 45. However, mass lamination capacity will be reduced to one additional production line from the previously four production lines planned. The key risk for Jadason is demand turn-up. Should this not materialise, factory loads will fall further with the addition of new capacity.

Downgrade to Hold. We are downgrading Jadason to a Hold and see fair value at $0.22 based on 8x FY08 PE; on par with its two year valuation band. Currently Jadason trades at 6x FY08 PE.