We expect the deferral of JHM’s expansion in Batu Kawan to hurt its growth prospects in the near term. The decision was due to a sizable customer in the US putting off plans to diversify its production into Malaysia on fears of global economic uncertainty. JHM will continue with the private placement exercise but with varied intentions and redeploying the proceeds to expand existing businesses. We trim our FY22F/FY23F earnings forecast by 3%/10%, resulting in a lower TP of RM0.90. Maintain MARKET PERFORM.

1. JHM made an announcement indicating a change in its private placement exercise. The group has decided to hold back on the proposed plant expansion on a 9-acre land in Batu Kawan that was acquired for RM21m back in May 2021. This decision came as one of its key potential customers in the US (involved in optical transceivers for telecommunication) has aborted its diversification plan to Malaysia on fears of global economic uncertainty.

2. Given that the initial approved private placement of up to 10% of issued shares (announced on 15 December 2021) did not take place even after multiple postponements, the group has decided to vary the intention and utilisation of the proceeds upon successfully completing the exercise. With an indicative price of RM0.82 bringing the gross proceeds to RM45.7m, the group will revamp its strategy and redeploy its resources to strengthen its existing automotive and industrial businesses.

3. The group’s new utilisation plan is as such; (i) RM5m for two more SMT lines as well as level 2 assembly equipment, (ii) RM28m for general working capital, and (iii) RM5m to establish a new embedded designs business segment with the remaining for repayment of borrowings and private placement expenses.

4. While the group indicated that the Batu Kawan expansion will be relooked at when market conditions improve, we expect this setback to have a negative impact to the group’s prospects in the near term as its growth was mainly hinging on the expansion.

Forecasts. Trim FY22F/FY23F NP by 3%/10% after factoring a lower revenue growth owing to the delay in its Batu Kawan expansion.

We keep our MARKET PERFORM recommendation with a lower Target Price of RM0.90 (previously RM1.30) based on lower 13.5x FY23F EPS (previously 17.5x) which is in line with its peers’ forward mean. We like JHM over the longer term for its: (i) exposure to the growing automotive LED market, (ii) proxy to the rising demand for 5G test equipment, and (iii) lucrative margins from the venture into hermetic glass seals. However, prospects in the immediate term remain unexciting owing to the deferral of its Batu Kawan expansion plan. There is no adjustment to our TP based on a 3-star ESG rating as appraised by us (see Page 4).

Risks to our call include: (i) order cuts by key customers, (ii) further delay in new product introduction, and (iii) higher-than-expected input costs.

Source: Kenanga Research - 4 Nov 2022