This is the first analyst report on JEP Holdings in a long time.
Excerpts from Phillip Securities Research report
Analysts: Paul Chew & Alvin Chia
|• Secular growth in aerospace where commercial aircraft orders have a 10-year backlog.
• Initiate coverage with a BUY recommendation and target price of S$0.20.
Our valuation is based on 10x PE FY19e. This is a discount to global aerospace parts supply chain valuations.
We believe the discount will narrow on the back of the future scale and consistent profitability.
In 2007, Alantac made a major acquisition of JEP Precision Engineering (JEPS) to venture into precision parts for the aerospace and oil and gas industries.
The combined entity was renamed JEP in 2010.
In January 2018, SGX-listed UMS Holdings acquired a 29.5% stake in JEP.
New management was installed after Mr Andy Luong was appointed as the Executive Chairman in February 2018.
Eighteen months later, UMS Holdings launched a mandatory conditional cash offer at S$0.15 per share. Its offer lapsed as the level of acceptances did not cross 50% of the voting shares. JEP was listed on the SGX as Alantac Technology in 2004. It initially specialised in semiconductor and hard disk drive parts.
1. Secular growth of the aerospace industry. Aerospace accounts for 54% of revenue. JEP has been building a track-record in precision machining parts for the aerospace industry.
Global backlog for aircraft deliveries has risen to around 10 years. There is a global search for capacity.
2. Turnaround under new management. After UMS took over management of the company in middle 2018, JEP has turned around and booked record earnings in the past 12 months.
Initiatives taken include right-sizing its workforce, transferring labour intensive work to lower-cost Malaysia and contract price renegotiations. Earnings in the past 12 months rose 9-fold.
3. Attractive entry point. We believe the valuations are attractive. Sector peers trade at an average of 20x forward PE. Our target price factored in a 50% discount for JEP’s smaller scale of operations.
|Outlook JEP’s growth is expected to stem from:|
|Firstly, resilient demand for commercial aircraft. Global passenger air travel is rising the fastest in decades. •
According to Airbus, aircraft demand is expected to sustain at a growth rate of 4.4% CAGR from 2018 to 2037.
Low penetration of air travel in emerging economies and a booming middle-class are some of the triggers of growth.
Commercial aircraft deliveries currently have a 10-year backlog of orders;
• Secondly, we expect further cost optimisation efforts from JEP’s transfer of more projects to lower-cost Malaysia.
• Thirdly, we are expecting JEP to gain more traction with existing and new customers. JEP in improving its execution and track record which will elevate their supplier status.
The current trade spat between the U.S. and China is another likely opportunity to move more aircraft components manufacturing into Southeast Asia.
Full report here.