JHM’s 9MFY22 results disappointed, hit by additional assessment and tax penalty. JHM also cautioned that waning demand in the near term could lead to subdued performance in the coming quarter. We cut FY22F earnings by 46% but keep FY23F numbers. We maintain our TP of RM0.90 (which is based on FY23F earnings) and MARKET PERFORM call.

Below expectations. 9MFY22 core net profit of RM12.2m (-24.1% YoY) came in below our and market’s expectations at 39% and 35%, respectively. The variance against our forecast was attributable to additional assessment and a tax penalty imposed by the IRB due to one of its subsidiaries deemed non-compliant for export allowance incentives claimed in 2018 and 2019.

Results’ highlights. YoY - 9MFY22 revenue increased 33.3% on greater demand from both the automotive segment (+42% YoY) and industrial segment (+22%). However, 9MFY22 core net profit (after adjusting for unrealised forex gains) fell 24.1% as the group was slapped with additional assessment in the reporting quarter of RM4.9m coupled with a penalty of RM0.7m from the Inland Revenue Board as one of the group’s subsidiaries was deemed not eligible — due to less than 60% of the company being directly owned by Malaysian citizen — for the export allowance incentives pertaining to YA 2018 and YA 2019.

No bumper year-end surge. Consistent with a weak outlook guided by automotive semiconductor players, JHM expects demand to remain volatile on economic uncertainty. The typical bumper year-end surge driven by the automotive segment may not materialise this year owing to weak consumer appetite for large-ticket item purchases. However, the group is still in discussion with new potential customers for both the industrial segment and automotive projects which includes global and local car brands.

Investment thesis. We like JHM for: (i) its exposure to the growing automotive LED market, (ii) being a proxy to the rising demand for 5G test equipment, and (iii) lucrative margins from its venture into hermetic glass seals. However, prospects in the immediate term remain unexciting owing to waning demand in the near term coupled with the deferment of its Batu Kawan expansion plan.

Forecasts. Cut FY22F net profit by 46% to reflect the additional assessment and tax penalty but maintain our FY23F earnings.

We keep our TP of RM0.90 based on 13.5x FY23F EPS, at a slight discount to its peers’ forward average of 15x to reflect its choppy earnings in the near term. There is no adjustment to our TP based ESG given a 3-star rating as appraised by us (see Page 4). Maintain MARKET PERFORM.

Risks to our call include: (i) persistent supply-chain disruptions, especially in the automotive sector, (ii) delays in the 5G rollout, (iii) escalating input costs, and (iv) a global recession hurting demand for electronic components.

Source: Kenanga Research - 1 Dec 2022