Jadason Enterprises:Outlook has not improved

Topline up, bottomline down. PCB driller Jadason saw a 72% increase in its 3Q08 revenue to S$58.5m although net profit was 58% lower at S$2.1m. This was mainly due to growth in the company’s lower-margined Equipment and Supplies (ES) division outstripping that of the Manufacturing and Support Services (MSS) segment.

Higher demand from the PCB manufacturers had boosted Jadason’s ES business, although the improved numbers from the company’s PCB drilling factory in Dongguan failed to shore up the whole MSS division. Additionally, FX losses of S$0.5m as compared to a S$1m gain in 3Q07 also impacted bottomline during 3Q08.

Plunge in margins. As seen in Figure 1, overall margins were drastically lower. While revenue for Jadason’s ES business had jumped 140% to S$40.2m in 3Q08 as shown in Figure 2, operating margins dived from 11.7% to 3.8% due to an unfavourable change in sales mix. Additionally, the company’s MSS segment also saw operating profit tumble 67.4% to S$1.3m despite the 6.1% increase in turnover as dismal performances from the PCB drilling facilities in Suzhou and Malaysia proved to be a drag.

Balance sheet concerns linger. Net gearing remained high at 61% although it was slightly better from 65% in 2Q08 while current ratio remained relatively flat at 1.3x. The company was also unable to generate a positive operating cash flow in 3Q08. In light of the current credit conditions, we note that Jadason may risk incurring higher borrowing costs should it continue to fail to generate cash to repay its debt which mainly consists of short-term loans. Earnings may therefore be hit as a result.

Murky outlook. Revenue from the company’s ES division is expected to stay healthy in 4Q08 although visibility for its MSS segment is clouded due to the on-going financial crisis. As management looks to focus on cash and cost management rather than capital expenditure going forward, we believe that bottomline growth in the company, if any, will be limited.

The North American PCB book-to-bill ratio currently stands at 0.95 which has been below the parity mark since May 08. Although Jadason is currently trading at 0.4x FY08F P/B which is in-line with the industry average, we are maintaining our SELL recommendation and slashing our price target to S$0.05 (from S$0.075 previously) due to its bearish prospects. We also note that save for Elec & Eltek, the other two SGX-listed PCB drillers (Multi-Chem and Eucon) are also expected to see dismal results for at least the rest of the year

The Material provided above is for information only and does not constitute an offer or solicitation to purchase or sell the shares mentioned