This is an excerpt from NRA Capital’s research report on Jubilee Industries Holdings Limited (SGX: 5OS).

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Turnaround story with long-term spin-off potential

We highlight Jubilee as a high-return and high-average-risk prospect based on an improving earnings outlook, increasing M&A momentum and the longer-term potential to spin off one of its business units.

We are quite certain about the near-term outlook of the component distribution business (Electronic Business).

The turnaround is further signalled by parent company Accrelist Ltd raising its stake in Jubilee from 29.1% to 64.73% in June 2017.

Improving financial performance after lengthy restructuring

The company acquired and expanded the profitable Electronic Business in 2014, while streamlining the loss-making legacy Mechanical Business which incurred gross losses and restructuring costs in FY17.

We expect losses from the legacy business to cease in FY18, especially after its downsizing in FY17 when the company retrenched some 116 staff.

Electronic Business as organic growth driver

The Electronic Business added to its portfolio the products of Samsung Electro-Mechanics in 2014 and that of Innodisk and NeoPhotonics in 2016.

Rising selling prices and full year contribution by new suppliers leads us to forecast the Electronic Business to deliver 50% revenue and gross profit growth in FY18.

Turning to M&A to revitalise the Mechanical Business

The ongoing acquisition of the Pioneer Venture Group by the Mechanical Business include a pre-tax profit guarantee of S$1.0m for each of FY18 and FY19 and can be said to be value accretive as the consideration is only six times the profit guarantee.

We expect the company to embark on more acquisitions and have projected the issue of additional shares to fund these acquisitions.

Substantial upside if growth is achieved

We expect the group to make PATMI of S$1.38m in FY18. For FY19 to FY22, we derived two scenarios.

The bear case assumes flat profit growth and cumulative net profit of S$11.4m from FY19 to FY22.

The base case assumes more aggressive growth and hence higher economies of scale and projects S$26.5m of cumulative net profit over the same period.

The bear case values the group at S$39.8m over 970m shares or S$0.041 per share while the base case values the group at S$76.7m over 1.085 billion shares or S$0.0706 (rounded to S$0.070) per share.

Future catalysts will be key to driving value discovery

The risk is that upside is conditional on the odds of future growth being realized and will be significantly impaired if the company fails to rapidly scale up the Mechanical Business via M&A or organic growth.

Secondly, there is the risk of further cash calls to fund working capital needs and acquisitions.

To factor in this risk, our base case workings are based on 1.085 billion shares outstanding, up from 672.5m shares today.

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