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Jadason - double digit % gains possible (TP: between 0.12 to 0.15). Fundamentals corroborate the Technicals.

July 6, 2017

Jadason's share price (Singapore Stock Exchange) has surged more than 400% from 1 year ago due to it’s turn-around story, I argue that Jadason share price still has more upside as I conclude the technicals corroborate the fundamental turnaround and hint of a further second up-move.

 

Jadason Enterprises Limited (Jadason) commenced its business in 1980 and is a leading supplier of equipment for the printed circuit board (PCB) industry in Asia. The group provides PCB drilling services in Dongguan and Suzhou.

 

After going through 4 years of net losses due to insufficient work and depreciating equipment, net losses bottomed at S1.2m in 2Q16, followed by three consecutive quarters of positive net profit (3Q16: S1.3m, 4Q16: S1.3m, 1Q17: S$0.3m).

 

Not to reinvent the wheel, recent analyst reports call a average target price based on fundamental of $0.16 SGD. This final stage turnaround is largely on the back of an acquisition of a major client that finally will push their utilization to very healthy levels. Increasing sales + roughly the same fixed cost = big increase in profits. Find the CIMB report and RHB report here.

 

What I will add to this is the technical story.

 

I rarely use technicals alone for long term trading. Usually, I use it for short term momentum, and reversion to average plays along with some statistical modelling. However, I do use technicals to see if it corroborates with long time framed cycles be it with a turn around story of a company or even the turning of a multi-year economic cycle. A turnaround usually takes a long period to consolidate. Fundamentally, the company has to repair their balance sheet, realign their focus in business, and make the necessary changes to be in the right place and right time. Stock market-wise, the weak players usually sell off first until only the strong players with industry knowledge remain. This process also takes time and a long base is usually formed. 

 

When the upcycle finally becomes obvious, it can last quite awhile, because the change in market participants holding the stock and sentiment took a long time to occur as well. 

 

But how do we know that an initial upsurge is part of a new upcycle and not just a quick retracement before continuing a decline? Jadason's chart gives us a couple of hints. Note: I am only covering a selection portion of the technicals. There is more market research that can be done to further corroborate the story, but I will not cover it here.

 Why there is likely a second move towards $0.15

1) Long-term Double Bottom with ...

2) Momentum divergence

3) Monthly MACD cross in mid 2016 and a 0-line upbreak in early 2017. This hints there is probably more to go - could be one more leg up.

4) The significant surge starting from the 2nd bottom in early 2016 to now is steep with high volume.  Usually, high volume with price surge is either a blow-off top due to great exuberance, or it is a strong impulse move that precedes a further second and/or third up-move. The behavior of the 2 months after the volume spike in the month of April 2017 where price is stabilizing with moderate volume leads me to suspect it's not a blow-off top. The fundamentals of the company balance sheet and earnings multiple after factoring in the new client's sales growth is reasonable and not exuberant.

 

Note that there is a multi-year resistance band there is at the 10.6 cents level. The price is negotiating this level right now, hence, a short pullback or consolidation at this level is reasonable.

 

If Jadason’s share price can breakout of it’s long term resistance at 0.106 SGD, then: 

Short-term price target: 0.12 SGD (Sentiment)

Longer-term price target: 0.15 SGD. (Longer term technical price objective - assuming no collapse in economy, mass-market sentiment or unexpected events)

 

Both price targets can be justified to a degree through earnings multiples. Cheers!

 

 

Disclaimer: This site has been designed for informational and educational purposes only and does not constitute an offer to sell nor a solicitation of an offer to buy any security which may be referenced upon the site. Please consult your own financial adviser to determine what trade is appropriate for you. See our full disclaimer here.

 

** The author of this post has a long position in Jadason.

 

 

 

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