Jackspeed Corporation: Aviation segment taking off
Labels:
Jackspeed
Broker House: OCBC Investment Research
Analyst: Selena Leong
Price: $0.275
Target : $0.33
Recommendation: BUY
Upside: 20%
Summary:
Analyst: Selena Leong
Price: $0.275
Target : $0.33
Recommendation: BUY
Upside: 20%
Summary:
Aviation - sustainable high margins. We visited Jackspeed's (JS) plant facility in Singapore recently and what stood out was the growth potential of its aviation business. JS repairs and refurbishes the aircraft's interiors such as its carpets and seats. Revenue from this sector grew 143.6% in FY07, contributing to approximately 10% of revenue. As indicated by management, gross profit margins averaged 40% at the minimum, with net profit margins hovering around 20 - 25%.
Buoyant outlook for aerospace industry. Moreover, Singapore is gearing up to be the region's hub for aerospace activities (like aircraft MRO); as evidenced by JTC and EDB jointly developing a S$60m, 140ha plot of land adjacent to the Seletar airport as an aerospace park expected to be completed in 2018. The Singapore aerospace industry has been experiencing a compounded annual growth rate of 12% over the last 15 years, accounting for approximately 25% of Asia's aerospace/ MRO activity. This is one of the fastest rowing industries, registering an output of S$6.3b in 2006, up from S$5.2b in 2005. In addition, fuelled by increasing demand for air travel, with the introduction of budget airlines and growth in air traffic from the strong economic growth of China and India, Boeing projects a doubling of aircrafts in Asia by 2015, indicating a potentially larger base for JS' repair services.
Slow down in auto segment offset by aviation growth. Sluggish auto sales have negatively impacted auto production in Malaysia and the cessation of a Ford contract in Thailand has contributed to a slowdown in demand for JS' leather seats. This caused a decrease in revenue of approximately S$6.5m in FY07 versus FY06. In addition, rising raw material costs have started to squeeze profit margins. Leather hide prices have risen around 10-15% since the beginning of this year. However, we believe that the growth in revenue and net margin from the aviation segment will more than mitigate the current slow down in demand for leather seats.
Maintain BUY, up fair value estimate to S$0.33. We expect JS to maintain its profitability in FY08. Our estimated fair value for JS has also been revised upwards from S$0.25 to S$0.33, with a forward PER of 13x. With JS' closing share price of S$0.275, this represents a potential upside of 20%. We are therefore maintaining our BUY rating for the stock.
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