• We expect weaker 2HFY3/19 results amid faltering memory chip market.
• JUBILEE INDUSTRIES HOLDINGS LTD. (SGX:5OS)'s FY20-21F earning growth outlook intact as memory market could recover in 2HCY19 and mechanical business could serve as a bright spot for growth.
• Maintain ADD with a lower Target Price of S$0.043.

Expect Weaker 2HFY3/19 Results Amid Faltering Memory Market

• We believe Jubilee Industries’ memory components distribution (EBU) segment could take a hit in 2HFY3/19 amid faltering sales of memory chips and dynamic random-access memory (DRAM).
• Gartner predicts that ASPs for DRAM could continue to decline through most of 2019 amid oversupply conditions. The situation probably started to reflect through weaker performance from Innodisk which reported 2% and 4% y-o-y revenue decline for 4QCY18 and 1QCY19 respectively. SK Hynix also suffered a 22% drop in 1QCY19 revenue, attributing to declining memory prices and lower sales shipment.

Despite Short-term Pain, Memory Outlook Still Promising

• Memory-chip market conditions could start to improve later in 2019, as Hynix guided for rising demand coming from data centres that could raise investment significantly from 3QCY19. High-density chip adoption for mobile devices could also help drive up the demand in 2HCY19.
• Catalyst could also come from the adoption of 5G standards that would likely spur the demand for memory chipsets in IoT devices ahead, in our view.

Lower FY19-21F EPS by 27-34%

• The slowing memory market in recent months could impact Jubilee Industries’ 2HFY3/19 earnings as the EBU segment accounted for 96% and 86% of its FY3/18 revenue and gross profit respectively. We thus trim our FY19-21F EPS forecasts by 27-34%.

• We still look towards earnings growth in FY19-21F as Jubilee Industries’ mechanical division (MBU) could still serve as a bright spot after delivering close to two-fold y-o-y rise in revenue to S$7.7m in 1HFY3/19.
• Capacity expansion plans for its EBU segment have been set in motion after it acquired HonFoong in Jul 18 and took on its first direct medical supplies customer.
• Jubilee Industries currently trades at 5.2x CY20F P/E (6.5x on a diluted basis, factoring in 255m outstanding warrants as at end-Sep 18), below peers’ average of 10.5x.
• We maintain our ADD call.
• Upside catalysts: stronger-than-expected profit contribution from the MBU division.
• Key risks include termination of distributorships with key principal suppliers.

Source: CGS-CIMB Research - 16 May 2019