JHM’s FY22 results beat expectations as it returned to profitability in the fourth quarter. The outlook remains challenging as improved orders for the automotive segment could be offset by higher overhead cost due to deferment of several new projects. We cut FY23F net profit by 14%, reduce our TP by 11% to RM0.80 (from RM0.90) and maintain our MARKET PERFORM call.

Above expectations. FY22 core net profit of RM23.0m (-15.8% YoY) exceeded our forecast and consensus estimate by 35% and 22%, respectively. The variance against our forecast is attributable to betterthan-expected loading volume in the 4QFY22 on improved orders from customers.

Results’ highlights. YoY, FY22 revenue increased 20% on higher demand for the automotive segment (+17.8 YoY) and even better loading volume for its industrial segment (+23.5%). However, FY22 core net profit (after adjusting for unrealised forex movements) fell 15.8% due to additional tax assessment of RM4.9m coupled with a penalty of RM0.7m as one of the group's subsidiaries was deemed ineligible for export allowance incentives pertaining to YA 2018 and YA 2019. This was due to the company having less than 60% direct ownership by a Malaysian citizen. That said, the group showed improvement by returning to the black in 4QFY22 compared to the immediate previous quarter and its cash flows from operations turned positive again.

Challenges remain. While the group displayed encouraging results, it is not spared from the general weaker outlook of the tech industry. Its improved orders for the automotive segment will likely be offset by unabsorbed overheads due to the deferment of new projects, such as: (i) hermetic glass seal business, (ii) collaboration with Jiangsu Dekai Auto Parts Company Ltd for headlamp assembly, and (iii) joint-venture with Mass Precision Inc for the fabrication of front-end equipment.

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 several new projects.

Forecasts. We cut our FY23F earnings by 14% and introduce FY24F numbers.

We trim our TP to RM0.80 (previously RM0.90) based on 15x FY23F EPS, in line with peer’s forward average. There is no adjustment to our TP based on 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 - 28 Feb 2023