JHM is anticipating a pick-up in orders from its existing automotive and industrial customers, extending into FY23. Despite more of its new automotive lighting projects transitioning into the mass production stage, profitability will continue to be capped due to new ventures start-up costs. Meanwhile, we keep our earnings forecasts, TP of RM0.80 and MARKET PERFORM call.

We came away from JHM’s 4QFY22 briefing yesterday with the following takeaways:

1. JHM has been awarded 14 new projects by a prominent American automotive lighting company. The first six models have already qualified and will transition into the production stage by 1H 2023. To cater for sample builds of the remaining models awarded, the group is also purchasing two more surface mount technology (SMT) lines. The first one will be installed by April followed by the second one by 4QFY23.

2. It expects orders from its existing automotive and industrial customers to improve going into FY23. However, its margins will likely remain subdued owing to the extended gestation period for a few of its ventures such as the hermetic glass seal and front-end equipment machining.

3. The impact of the higher electricity tariffs on JHM is marginal given that only one of its plants is subject to an upward revision, resulting in additional c.RM15k/month (which could be mitigated by applying to convert the plant’s land title from commercial to industrial which is more appropriate). Meanwhile, the electricity consumption of all the other plants is below the tariff hike threshold, and hence spared the higher electricity cost.

Forecasts. Maintained

We also maintain our TP of RM0.80 based on 15x FY23F EPS which is in line with its peers’ forward mean. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

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) the lucrative margins from its venture into hermetic glass seals. However, prospects in the immediate term remain unexciting owing to waning demand coupled with the deferment of several new projects. Maintain MARKET PERFORM.

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

Source: Kenanga Research - 7 Mar 2023