3 Reasons For The Bullish Case Of Jubilee Industries Holdings

Shares Investment started covering Jubilee Industries Holdings (Jubilee) back in November 2017, slightly before the announcement of Jubilee’s 1H18 results.

Through our interview with the Chief Executive Mr Terence Tea, Shares Investment found that Jubilee sells for a compelling turnaround story. Its results did not disappoint.

Post-restructuring, Jubilee returned to profitability and reported a net profit of $0.8 million in 1H18 after two years of losses since the acquisition of its electronic components distribution (ECD) business in January 2015. Originally, Jubilee was a pure-play mechanical moulding company until it underwent a long period of restructuring when Mr Tea took over the reins.

Other brokerages have also joined in on the growing interest of Jubilee. Here are 3 reasons why investors should be bullish about Jubilee.

1. A One-Stop Platform

Jubilee’s legacy mechanical business, though downsized, is still very much in operations. Its key customers include a growing number of global electronics products producers such as Hewlett-Packard (HP), Dyson and Flextronics. The business which comprises precision injection moulding and design, fabrication and sale of plastic injection moulds saw sales increased to $4 million in 1H18, from $3.6 million a year ago. According to CIMB, this could hint to an earnings turnaround for the segment, after the four consecutive halves of declines.

Driving Jubilee’s performance more significantly is its fast-expanding ECD business. Riding on the electronics component uptrend regionally, Jubilee’s ECD sales expanded 90 percent to $84.4 million in 1H18, accounting for about 96 percent of total revenue. The increase in sales was partially due to the inclusion of new product lines from Neophotonics and Innodisk which happened in 2H17. The ECD business also carries and distributes multilayer ceramic capacitors (MLCCs) for Samsung Electro-Mechanics. MLCCs are components for smartphones and several other high-tech electronic devices and CIMB expects higher demand for these capacitors going froward. To reiterate that, Mr Tea highlighted that the new generation of iPhones packs over hundreds of MLCCs compared to 50 plus for older generations.

Jubilee also owns stakes in its Bursa-listed associate EG Industries (EG) and it boosted its stake from 11.7 percent to 13 percent just last week on 12 March 2018, after it acquired another 3.5 million shares of EG from the open market at about RM2 million. EG’s main business entails printed circuit board assembly and box build. As of 1H17, EG is profitable, generating net profit of RM11.7 million on revenue of RM502.4 million.

2. Expanding Capacity For Moulding Business

Jubilee is expected to increase moulding capacity by fivefold, bringing the total number of moulding machines to 151. In December 2017, the company acquired PT Honfoong Plastics Industries (Honfoong) for $3.5 million, which will add to its 93 moulding machines in Batam, Indonesia. In addition, Jubilee intends to add another 32 new machines to its existing Malaysian plant which has 26 machines.

At the time of the announcement, Honfoong has a net tangible asset valued at $2.4 million and recorded a profit before tax of $1 million, based on 9 months period ending 30 September 2017. The earnings-accretive acquisition is also expected to drive Jubilee’s performance going forward.

3. Margin Expansion As Company Turns Around

CIMB expects Jubilee’s margins to improve as a result of leaner manufacturing and better product mix with higher margin and commission. In addition, the expansion in capacity of its mechanical moulding business should help Jubilee reap better economies of scale.

CIMB further noted that Jubilee has already seen overall gross margin improved from 4 percent from 2H17 to about 6.4 percent in 1H18. According to CIMB, Jubilee’s management further guided that its mechanical segment could deliver higher gross margin that could potentially hit the mid-teens, helping to prop up the low-margin ECD business (5 to 7 percent).

ADD Conviction

Wrapping up its bullish ADD call on Jubilee, CIMB estimates that the company would more than double its earnings to $4.8 million by FY19. Factoring in the dilution owing to the recent rights cum warrants issue completed on 1 March 2018, CIMB found Jubilee to be trading at about 6.4 times forward FY19 earnings.

CIMB gave Jubilee a target price of $0.051, representing a potential upside of 24.4 percent from its current share price of $0.041.

Click HERE to read about our interview with Jubilee’s management.