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

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Background

Jubilee proposed on 11 October the issue of one Rights Share (RS) cum one free detachable Warrant (W) for every two existing shares, at the Issue Price (IP) of S$0.045 for each RS.

Each W can be converted into one ordinary share at the Exercise Price (EP) of S$0.045, at any time within two years from the date of issue of the W.

The parent company Accrelist Ltd. has undertaken to subscribe for its pro-rata share of the RS(s) and take up 15% of all excess RS(s).

An investor Summit Planners Advisory Group Pte. Ltd. will subscribe for 85% of the excess RS(s).

Funds to add option of organic growth, beyond M&A

Jubilee plans to spend about S$9m on the Mechanical Business, evenly split between capacity addition and M&A.

The remaining S$6m will be used as working capital, primarily for the growing Electronic Business.

The funds will provide the additional option of organic growth to scale up the Mechanical Business.

Mentioning that current machines are operating at full capacity, the company targets to have 150 moulding machines for the Mechanical Business by end FY18, up at least five times from the current 20 to 30 machines.

Aggressive growth plans justify our forecasts

The targeted exponential growth in capacity, in turn, supports our base case scenario forecasts of high revenue growth from the Mechanical segment, while reducing reliance on M&As.

Our model projects Mechanical Business revenue to grow from S$8.36m in FY17 to S$18.36m in FY18 and S$38.36m in FY19.

The target increase in moulding machines matches our projected revenue growth.

29 June proposed placement may not happen

Given the IP of S$0.045 and the expected war-chest of S$15.0m, we reckon that Jubilee may not proceed with the proposed placement of shares at S$0.0333 announced on 29 June.

We revised our model to factor in the rights issue and our projections show that it will be more value accretive to forego the Pioneer Venture acquisitions and the 29 June placement, given the same revenue and profitability projections.

Hence, we amend our assumptions to assume only one acquisition to be funded by mainly cash rather than shares and derived an updated valuation of S$0.067 per share, taking into consideration dilution from the rights issue and warrants conversion.

Key merits remain intact

We reiterate that we expect Jubilee to turn around in FY18, starting with some profitability in 1H18 followed by higher returns in 2H18.

Fundraising risk is now reduced with the Rights issue, but upside may also be capped by periodic warrants conversion in the future.

Therefore, value discovery will depend even more on the achievement of future growth and catalysts e.g. M&A and capacity expansion.

On balance, we maintain our Overweight rating on Jubilee with an unchanged high return and high-average risk qualification.

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