2QFY22 may be challenging due to automotive component shortage faced by a key customer, resulting in order deferments. Qualification process with two new customers remain on track, to start production in 2023, with the JV with Dekai recently completed a 20k sq ft plant and estimated to begin qualification by Nov. In addition, the industrial segment is experiencing encouraging orders which could cushion the lower contribution from the automotive segment. We trim our FY22E/FY23E earnings forecast by 14%/6%. Maintain MARKET PERFORM with a lower TP of RM1.30.
We recently met with the group, with the following key takeaways:
1. We gathered that 2QFY22 may be a challenging period for the group due to some hiccups in the automotive segment with one of its key customers having to temporarily halt production on supply chain issues. While JHM is well prepared in terms of component supply, the problem lies with the customer which could not secure sufficient critical components to complete the final product. As a result, this has led to deferment of orders into subsequent quarters. On a positive note, the industrial segment still sees an encouraging order pipeline as key customers are providing higher order forecasts for the subsequent quarters.
2. Engagement with new automotive customers is progressing as scheduled. The group is currently producing sample builds of various products for two new customers to qualify. Due to the nature of the automotive industry where the qualification process is more stringent and lengthier, the group expects to pass qualification and start production only by 2023. In addition, the partnership with China’s Jiangsu Dekai Auto Parts (Dekai) remains on track with the recent completion of a 20k sq ft plant in Sungai Petani, Kedah. The group is now renovating the interior and purchasing equipment to prepare for qualification in Nov 2022.
3. The group has also embarked into the hermetic glass seal business with the purchase of 3 sealing furnaces which will be used to encapsulate components with heat treatment that goes up to 1,000 centigrade. Applications of these components are used in high pressure or sensitive environments such as the aerospace, medical and automotive segments. Currently, all three furnaces have arrived at the group’s premise while awaiting the arrival of a few core components before commencing operations in 4QCY22.
Trim FY22F/FY23E NP by 14%/6% to RM32.5m/RM41.4m after factoring in the challenges from the automotive segment.
We keep our MARKET PERFORM recommendation with a lower Target Price of RM1.30 (previously RM1.40) based on 17.5x FY23E (in line with peers’ Fwd. mean). There is no adjustment to TP based on ESG (3- star rating as appraised by us).
Risks to our call include: (i) reduced orders from key customers, (ii) delay in 5G rollout, and (iii) higher-than-expected input costs.
Source: Kenanga Research - 9 Aug 2022
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Created by kiasutrader | Mar 25, 2024