The aviation industry is one of the worst hit industries amid the Covid-19 outbreak. International air travel has collapsed as countries worldwide are keeping their borders closed to contain the outbreak.
This has caused an overcapacity in aircraft production, a reverse from the insufficiency during pre-Covid times. Orders have mothballed.
Provider of precision machining and engineering services for the aerospace industry, JEP Holdings, is expected to go through a rough 18 months as aviation equipment orders have frozen, according to PhillipCapital.
With that, analyst Paul Chew in an August 21 report has downgraded JEP to “reduce” from “buy” with a lowered target price of 15.8 cents from 26 cents previously.
“With the lack of visibility, we are benchmarking our target price to book value. We still expect to be profitable but depressed in the medium term. Any valuation based on earnings would understate the earnings potential of the aircraft machining operations,” says Chew.
“Aerospace was around 60% of JEP revenues. We are not expecting any recovery in aerospace orders until end 2022,” he adds.
In its latest 1H20 results, JEP booked earnings of $4.6 million, 38.1% higher than $3.3 million, despite revenue dropping by 5.2% y-o-y to $42.4 million.
The increase in earnings was mainly due to a surge in other operating income to $2.6 million from just $0.6 million a year ago, as a results of government grants. Without the government grants, PATMI would have declined to 22% y-o-y to an estimated $2.6 million.
Since the aerospace industry is grounded, Chew expects the company to pivot its focus towards semiconductor projects with the support from UMS and cost restructuring exercises in the medium term.
Some of the initiatives Chew believes JEP will undergo during this period of consolidation in aviation are: UMS can tap on JEP to utilise their excess capacity for semiconductor orders; Further realign cost and production into the Malaysian factories; Pursue more semiconductor equipment and printing projects, in particular customers looking to shift out of China.
To recap, both JEP and UMS share the same executive chairman and CEO, Andy Luong. UMS currently owns a 40.1% stake in JEP.
As at 12.10pm, shares in are trading at 19 cents or 14.2 times FY20 earnings.