Our conference call with JHM reaffirms our high conviction OP call (TP: RM2.00). Plenty of upside remains as current 17.6x FY21F PER still trails UWC’s >30x. Automotive LED orders are at 4x normal capacity and industrials segment sees doubling of revenue from a US customer thanks to 5G rollout. 2Q will likely sustain QoQ despite Covid-19, followed by strong 3Q-4Q. Secured new automotive customers, for which production will commence within the next two months. We present a blue-sky TP of RM2.75 assuming potential bonus projects crystallise.

Plenty of upside remains. We organised a conference call with JHM’s CEO, Dato’ Tan King Seng, and Deputy Finance Director, Low Soo Kim. The session was well attended by ~50 participants. The call reaffirmed our high conviction OUTPERFORM recommendation with a target price of RM2.00. Despite rallying 24% after our initiation report (29/06/2020), we think the stock is still cheap at FY21E PER of 17.6x, a steep but unwarranted discount to UWC’s >30x (based on Bloomberg consensus).

Surprisingly strong 2H outlook. To our positive surprise, 2Q will likely sustain QoQ despite the Covid-19 impact, followed by stellar 3Q-4Q. The company is ramping up automotive LED orders by 4x normal capacity on customers’ request, backed by strong rebound in car sales. The group has also secured several new customers including one which is the biggest auto LED player worldwide with ~30% market share. Production for these customers is expected to commence within the next two months. In the industrials division, we also expect doubling of revenue from a US customer (specialising in signal test and measurement equipment) for FY20 thanks to aggressive 5G rollout.

Blue-sky TP of RM2.75 from exciting bonus projects. In our blue-sky scenario, we present a possible TP of RM2.75 (based on same PER of 22.2x but with 38% higher FY21F earnings) considering potential projects which have not been factored in. Besides 5G, the group is also working with the same US customer on EV/AV charging stations to be deployed globally – orders that are potential bigger than that of 5G’s. Other projects in the pipeline including horticulture (for Singapore initially and potentially Hong Kong later) and hermetic glass seals (for autonomous vehicles) are wild cards that may morph into new earnings drivers in the future. These will be supported by a 150% floor space expansion from 80k sq ft to 200k sq ft, slated for completion by end of this month.

Maintain FY20E and FY21E NP of RM31.6m and RM49.9m representing growth of 3.6% and 58.2%, respectively.

Reiterate our high conviction OUTPERFORM recommendation with an unchanged Target Price of RM2.00 based on FY21 PER of 22.2x (representing +1SD above its 3-year mean). At current level, JHM is trading at FY21E PER of 17.6x, a steep but unwarranted discount to UWC’s >30x.

Risks to our call include: (i) less aggressive orders from its key customer which translates to lower-than-expected sales, (ii) delay in 5G rollout, and (iii) higher-than-expected input costs

Source: Kenanga Research - 8 Jul 2020