JHM registered 3QFY20 CNP of RM7.9m (+95% QoQ; +9.6% YoY) on record high quarterly revenue of RM78.1 (+61% QoQ; +22% YoY), bringing 9MFY20 CNP to RM13.4m (-41% YoY). We deem the results as underwhelming, representing 43%/44% of our/consensus estimates. The group was impacted by higher administration cost which is expected to remain high in 4Q due to the hiring of more engineers to oversee a slew of new NPIs which will contribute meaningfully in FY21. Revise call to MARKET PERFORM on valuation grounds as the stock has performed well, rallying 45% since our initiation coverage in June. We maintain our Target Price of RM2.00.

Below expectation. The group recorded 3QFY20 CNP of RM7.9m (+95.2% QoQ; +9.6% YoY) after adjusting for unrealised forex losses of RM2.6m. This brings 9MFY20 CNP to RM13.4m (-40.9% YoY), representing 43% of our, and 44% of consensus, estimate. The numbers came in below expectations owing to and higher administration cost.

Results’ highlight. QoQ, 3QFY20 CNP almost doubled to RM7.9m after adjusting for unrealised forex losses of RM2.6m. Revenue rose 60.9% to RM78.1m, marking a new high. This was led by higher orders from both automotive (+89.7%) and industrial segment (+26.1%). YoY, 3QFY20 revenue climbed 22% while CNP inched 9.6% higher. Cumulatively, CNP fell 40.9% on a 6.5% decline in revenue as the group was negatively impacted by the MCO lockdown in the earlier quarters, causing an 18% decline in the automotive segment. However, the industrial segmentmanaged to grow 15% thanks to better contribution from 5G equipment.

Change of auditor concerns misplaced. We believe there was a misperception regarding JHM's change of auditor announcement, causing some panic selling yesterday. JHM's auditor has been changed mfrom Grant Thornton to Grant Thornton Malaysia, which is due to restructuring at Grant Thornton itself. We understand there is no auditingissue at JHM.

Paving the way for a better FY21. High administrative cost is expected to remain in 4Q into as the group hired more engineers and a seniormarketing person in Germany. We understand that these costs were incurredto pave way for a better FY21 as the group is working on a couple of new product introduction (NPI) for its industrial segment. Samples and prototypes have been submitted and are currently undergoing qualification process. On the automotive side, the group has been approached by one of the biggest auto LED players worldwide with ~30% market share. With a solid recovery in the automotive market, we believe FY21 will be a good year for JHM.

We maintain FY21E CNP but tweaked FY20E CNP by -24% on higher administrative costs as well as certain projects in 4QFY20 being pushed to FY21.

Revise our call to MARKET PERFORM from OUTPERFORM with an  unchanged Target Price of RM2.00 based on FY21E PER of 22.2x (+1SD to its 3-year mean). Our change in recommendation is purely on valuation grounds as the stock has rallied 45% since our initiation coverage.

Risks to our call include: (i) higher-than-expected sales, (ii) increase of orders from its key customers, and (iii) favourable currency translations.

Source: Kenanga Research - 27 Nov 2020