Going the right way, but market is still hesitant

Jasco Electronics has gone through a lengthy restructuring process, but the changes it has rung in still have to be fully realised in its results.

The technology group, under the leadership of CEO Pete da Silva, has been streamlining its operations since he took charge three years ago. Its seven divisions have been compressed into three and its troubled investment in cable group M-Tec no longer dominates its concerns.

Jasco says it will continue its efforts to reduce cost and to move into new geographic and market segments. “As outlined before, the full impact of the restructure will start flowing through from 2015,” it said when it released its half-year results to end-December.

Judging from its latest

numbers, it is probably hoping it would be the low-water mark in its efforts to turn itself around. Revenue dropped 5,3% to R502,3m, operating profit before tax plunged 39% to R7,7m and headline earnings sank 82,3% to R1,4m for the period.

The group was hurt by a labour strike in its electronic manufacturing division, which had a negative effect of R5,8m on operating profit.

It says if it were not for the strike, operating profit before tax would actually have risen 5%. The company’s earnings numbers may have taken a knock over the period but its cash management has shown some improvement as a result of better working capital management.

Its bank overdraft was reduced from R36,5m to R3,2m and cash inflows from operating activities were R10,9m, compared with the R1,8m outflow in the previous financial year.

Though the company has made progress in managing its cash, it has no cash on hand, even after its coffers were boosted by a R55m rights offer and the disposal of its head office for R60m in the past financial year. The group hopes its turnaround efforts will pay off this year, but it will have to happen in a skittish economy. It points out that some of its key customers are delaying orders and that there is a noticeable rise in competition. Revenue at its enterprise division, for instance, dropped 10% to R170,8m because a R20,8m project was delayed till January.

Though Jasco is heading in the right direction, its holding in M-Tec still has not been resolved. It has as 51% holding in the group while Korean fibre-optic cable manufacturer Taihan Electric holds the remaining 49%. The arrangement has not been an easy one, because despite Jasco holding more than 50%, Taihan has operational control.

Jasco put its holding in M-Tec up for sale but as it has not yet found a buyer it had to incorporate its contribution into its results. Even so, it says a lot about how it has managed to scale down its exposure to M-Tec, because it has only had negligible impact on its latest figures. In contrast, M-Tec’s poor performance was blamed for the 27% drop in overall headline earnings in the half year results to end December 2013.

Jasco might be confident its efforts will pay off, but the market is hesitant. In the past year its share price has fallen from a high of R1,25 in July to 53c and it has a price:earnings ratio of only 3,56. Nevertheless, it should be noted that some of its directors, including Da Silva, have bought close to R875 000 of the group’s shares since the beginning of the year.

Jasco has come a long way, but it is probably best to hold off on making a decision on whether to buy its securities till after its year-end results.

And even if its earnings show an improvement, its cash management will probably be the most telling indicator on the performance of the group.