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Metals prices have breached new highs and continued to test new highs. Inversely, JAG Berhad (0024) share price has deflated from its high of RM0.40. The market appears to be acting out of whack here.

Look at the following 3 charts here on the 3 commodity metals highlighted in JAG’s 2019 Annual Report. Copper, Tin, Gold. They are on an uptrend and continue to test new highs.

JAG is principally involved in total waste management, which contributes to almost 99% of its revenue. It is one of the market leaders in the e-waste recovery business in Malaysia. It is one (1) of eleven (11) recycling companies in Malaysia with full recovery license awarded by the Department of Environment (DOE).

JAG takes apart the obsolete electronics disposed and processes the gold, silver, copper, tin, nickel that are sitting on the semiconductors, printed circuit boards and electronic parts.

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In its Q2 FY2020 earnings release (on 24 August 2020), Management said the following.

The price of commodities especially precious metals such as gold, silver, platinum and palladium have been on a market uptrend since March 2020 up to current date of this report. The Management views the positive movement benefits the financial performance of the manufacturing and trading division.

It had even titled its Q2 FY2020 results press release “BRIGHT PROSPECTS FOR JAG BERHAD“.

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Let’s look into the recent financials.

JAG has returned into the black in Q4 FY2019, with huge expansion in its GP margin and PAT margin. The progress saw some minor bump in Q2 FY2020 due to temporary one-month halt in its operations during the MCO. Yet, financials remained in the black with decent margins.

1HFY2020 PAT stood at RM 3.6million. By simply annualizing the numbers, we get a Full Year FY2020 PAT of RM 7.2million. At its current share price of RM0.165 (market cap of RM 75million), it’s trading at 10x PE.

However, if you look at the chart below on the forecast numbers, PAT could potentially be higher.

Let’s assess what had happened to commodities/metals prices from Q2 FY2020 to Q3 FY2020.

  • Copper were up 22.1%.
  • Tin were up 12.3%.
  • Gold were up 12.3%.

That’s an average 15% increase in selling prices from Q2 2020 to Q3 2020.

With a 100% operational Q3 quarter, coupled with a 15% increase in selling prices (as opposed to having one month of operations being halted in between Q1 and Q2), JAG’s Q3 FY2020 PAT could potentially achieve the region of RM 4million.

Assuming commodities prices remain at Q3 2020 levels until end of 2020, we are looking at a potential full year PAT of RM 11.6million. (1HFY2020 of RM 3.6million + Q3 of RM4mill + Q4 of RM4mil)

At its current share price of RM0.165 (market cap of RM 75million), it’s trading at PE of 6.5x.

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Does it warrant the single digit valuation multiple? Let’s look into the potential growth boosters for the Business.

  • Operational improvements and capacity expansion – JAG is commissioning a customized carbonator, which is expected to double its carbonation treatment capacity. This will also improve its production efficiency, yielding higher revenue and profits.
  • Copper prices reaching new highs – Manufacturing activity in China accounts for half of global copper consumption. Recent economic numbers show that China in on a better recovery track with its authoritarian methods in dealing with the pandemic. A stronger demand on a stronger recovery in China, coupled with copper supply issues will increase copper prices further.
  • Gold prices reaching new highs – The US Federal Reserve continues to employ easy money policies. Gold price will continue to increase as more money flow into the asset class, in a bid to hedge again inflation and the devaluation of US Dollars. A Biden election win will mean a larger stimulus package, potentially accelerating the increase in gold prices.
  • Further increase in Tin prices – Almost half of all tin usage comes from soldering in semiconductors. The pandemic has accelerated the digitization of enterprises globally. Demand for semiconductors will increase, as consumption and purchase of mobile phones, tablets, computers, laptops, servers increase on the back of global workforce digitization.
  • Winning LSS4 / LSS MEnTARI – JAG has bid for the Large Scale Solar Facility development, that is expected to be announced towards the end of the year 2020. Winning the bid will provide JAG with a boost in more stable earnings and cash flow over the longer term.

If the market awards JAG a PE of 10x on a potential RM 11.7million FY2020 full year PAT = a 54% upside to RM0.255.

Ticking off more catalysts stated above, may allow the market to award a higher PE of 15x to 20x = 133% to 212% upside at RM0.385 to RM0.515.

JAG’s Managing Director, Dato Ng Aik Kee seems bullish on his company, having purchased 69,800,000 shares in the months of March, June, August and September, at an average price that in higher than the current share price.

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