SINGAPORE (Mar 1): RHB is downgrading its recommendation on Jadason Enterprises to “neutral” from “buy” previously with a target price of 8 cents.

This came on the back of the group yesterday announcing that its FY17 earnings were up by 54% to $2.82 million from $1.83 million in FY16.

Revenue was 10% higher y-o-y at $63.1 million, but cost of sales increased 16% y-o-y to $51.1 million, bringing gross profit to $12.0 million, 7% lower than $12.9 million a year ago.

In a Thursday report, analyst Jarick Seet says that the group’s underperformance in FY17 was due to forewarned issues, mainly in hiring workers to keep up with the ramp-up in demand.

At 2016, the group had about 600 workers in total and although its revenue has increased since, its workforce remains at 600 people. There is a high probability that the group will only be able to hire more people be end-2Q18.

Despite efforts to hire more workers, the group is still short of 400 workers to meet its optimum number.

“This has negatively impacted FY17 earnings, which would have been much better if the shortage or workers labour issue is resolved,” says Seet.

The group has currently has overflowing orders from customers, but the ramp-up in production to a full utilisation rate was not possible due to the shortage of workers and parts.

Meanwhile, the analyst expects the group’s orders to continue growing with its mobile customer’s new product, which was recently launched and is currently enjoying strong global demand. Also, machine parts that were delayed could likely be delivered – which would help to improve and speed up utilisation and production.

Hence, Seet expects a stronger FY18 ahead with stronger margins.

As at 4.00pm, shares in Jadason are trading at 7.2 cents, giving the stock a FY18 price-to-book ratio of 1.07 with a dividend yield of 3.8%.