Jadason Enterprises: Margins declined because of product mix
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Jadason
Broker House: DMG & Partners
Analyst: Lynette Tan
Price: $0.21
Target : $0.30
Recommendation: BUY (Maintained)
Upside: 42.86%
Summary:
Analyst: Lynette Tan
Price: $0.21
Target : $0.30
Recommendation: BUY (Maintained)
Upside: 42.86%
Summary:
Jadason reported net profit of S$5.4m in 1H07, down 43% from S$9.7m in 1H06. This was due to a 56% YoY drop in 2Q07 operating profit from manufacturing services, which management attributed to changes in product mix and lower demand for handset PCBs.Nevertheless, management has proceeded with its expansion plans of adding mechanical PCB drilling machines as it expects the PCB industry to improve in 2H07. Given the high operating leverage of drilling operations, 2H07 may produce upside surprises. Maintain BUY with a reduced 12-month target price of 30c, down from 38c.
Weakness in 1Q07 continues into 2Q07. After a 54% YoY decline in 1Q07 net profit, Jadason follows with another 32% YoY decline in 2Q07. Net profit of S$5.5m in 1H07 is 43% lower than 1H06. Management attributed this poor set of results to lower equipment sales, and unfavorable product mix in its manufacturing service, which include mechanical drilling services, and mass laminate production. However, the second quarter saw a sharp fluctuation in Jadason’s utilization rates, with 100% utilisation in April and 60% in June. Management explained that a major handset PCB producer suddenly delay its orders in May. 30 new drilling machines were added in 2Q07, bringing the total number to 170 by end Jun 2007.Compounding this weak performance was an unexpected strengthening of US and Hong Kong dollar in 2Q07 against Sing dollar. This led to an unrealized forex loss of S$323k in 2Q07 against S$269k gain in 2Q06.
Outlook for 2H07 is better. Management expects the PCB industry to improve in 2H07. This prognosis is based on indicative orders from Jadason’s customers. We concur with such optimism in view of the impending launch of 3G phone services in China, latest by 4Q07. As handset need to be delivered to the distribution channels before the service launch, we expect orders for handset PCB to ramp up in 3Q07.
Orders flow should improve. Orders for PCB typically pick up in 3Q to be in time for year end consumption binge. We expect the pick up to be stronger in 3Q 2007 because the PCB industry has been in the doldrums since Dec 2006. Channel stockpiles are not excessive. However, there are lingering uncertainty as Windows Vista has not taken off strongly, and sales of new games consoles were not as strong as earlier expected.
Valuation and recommendation. We have reduced our 2007 net profit forecast from S$22.4m to S$17m (EPS: 2.4c) and 2008 from S$36.5m to S$30m. (EPS: 4.3c) Maintain BUY with a reduced 12-month price target of S$0.30, down from S$0.38, on an unchanged target of 7x FY08 earnings.
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