Excerpts from UOB KH report

Analyst: Clement Ho

Riding On UMS’ Coat-tails 
The step-in by a semiconductor specialist to lead the group in early-18 may have proven to be in good time, two years before the massive impact on the aerospace industry due to the COVID-19 pandemic.

JEP 

Share price: 
17 c

Target: 
20 c

Diversifying away from aerospace, JEP has been filling orders from the structurally growing semiconductor industry, helped by controlling shareholder UMS Holdings.

Initiate coverage with BUY and target price of S$0.20.


INVESTMENT HIGHLIGHTS
Diversifying away from aerospace orders and moving towards semiconductors. Following the controlling stake taken over by UMS Holdings (UMS) in mid-19, JEP Holdings (JEP) could see a timely revenue shift from the waning aerospace industry and towards the expanding semiconductor industry.

Currently fulfilling its backlog to aerospace clients that have not pushed back or cancelled their orders, JEP’s semiconductor division, Dolphin Engineering, is understood to be doing well as of Aug 20.

Potential beneficiary of US-China trade war. Headquartered in Singapore, JEP operates out of four manufacturing facilities across the island.

Together with its controlling shareholder, UMS Holdings, the duo has no manufacturing facilities in China and are not directly impacted by the on-going trade tensions between the US and China.

With the geographic positioning in the region, JEP could benefit from new clients that are increasingly shifting away from the North-Asia region.


Cost reduction underway. Since 4Q18, JEP started streamlining its operations by moving labour-intensive works from Singapore to Malaysia, and with a string of cost-cutting exercises.

andy luongAndy Luong (executive chairman and CEO of UMS Holdings): Executive chairman and CEO of JEP Holdings. NextInsight file photo.This resulted in a significant improvement in profitability in 2018 and 2019.

Accordingly, net profit has risen from a region close to breakeven throughout 2014-17, to S$2.2m and S$6.5m in 2018 and 2019 respectively. Supported by improved profitability, we expect earnings to stay elevated in 2020-22F.

Positive FCFF to alleviate debt concerns. As at end-1H20, net debt for JEP stood at S$27.5m, implying an elevated net gearing ratio of 0.43x.

This has fallen from S$35.6m (net gearing: 0.75x) in end-17 and we believe that one of management’s priorities is to lower its gearing ratio.

Going forward, we expect JEP to be able to generate positive FCFF, supported by healthy net cash from operations. This should improve the group’s ability to pare down its debt.

STOCK IMPACT
Near-term weakness bolstered by rising semiconductor sales. Due to order cancellations and deferments for aerospace parts, 2020F revenue is expected to decline 7.3% to S$82.5m (1H20: -5.2% yoy to S$42.4m; 2019: +3.6% yoy to S$89m).

We are looking for top-line growth to return in 2021F and 2022F, with projected increases of 3.9% and 9.4% yoy to S$85.6m and S$93.7m respectively.

This should be led by the anticipated strong upsurge in demand for semiconductor-related components.

Improving cost structure to support rising profitability. Between 2014 and 2017, JEP suffered from high fixed cost.

Gross profits obtained in each of the three years amounting to S$5m-10m were mainly spent on staff cost.

This has since changed under the new management team.

Together with better gross margins, operating profits have improved in 2018-19 where the group saw a significant expansion in EBIT to S$4.7m and S$8.7m, translating to margins of 5.5% and 9.8% respectively.

We expect the cost reductions to remain sustainable and estimate EBIT of S$6.5m (-27%), S$8.4m (+41%) and 10.7m (+33%) in 2020-22 respectively.

VALUATION/RECOMMENDATION
Initiate coverage with BUY and target price of S$0.20. Our P/B valuation is pegged to its historical 7-year average of 1.1x, backed by an 8.7% 2021F ROE, which also implies forward PE of 13.1x.

We believe the valuation is justified given that the cost reduction exercise will result in a sustainable increase in ROE ahead.

Currently, JEP trades at 1.0x 2021F P/B and an implied 11.5x forward PE.

SHARE PRICE CATALYST
• Higher-than-expected factory utilisation rate from more semiconductor orders.
• Greater-than-expected cost cutting measures.

Full report here. 

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