JHM’s 1QFY23 results missed expectations. Its net profit plunged 79% due to: (i) unfavourable automotive product mix, (ii) losses at its industrial segment, (iii) unfavourable forex movements, and (iv) higher utility cost. Meanwhile, order commitments from its customers remain subdued. We cut FY23-24F net profit forecasts by 34% and 15%, respectively, reduce our TP by 6% to RM0.75 (from RM0.80) but maintain our MARKET PERFORM call.

Missed expectations. 1QFY23 net profit of RM1.9m (-79.1% YoY) disappointed, accounting for only 6% and 5% of both our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from higher-than-expected operating cost and unfavourable forex movements. 

Results’ highlights. YoY, 1QFY23 revenue dropped 10% as both the automotive segment (-7.8%) and industrial segment (-14.6%) experienced lower loading volumes from their customers. However, net profit plunged 79% primarily due to poor overhead absorption resulting from the industrial segment operating below its optimal levels. Not helping either, were an unfavourable product mix in the automotive segment, adverse forex movements and the burden from higher electricity cost.

Choppy waters ahead. The group acknowledged the challenges in the current economic environment, particularly in the tech sector. The automotive segment continues to experience a lack of commitment from car manufacturers on the order replenishment front while its industrial segment’s economies of scale is eroding due to reduction in loading volume. Furthermore, there is still a slew of new projects deferment 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 which may continue to exert pressure on profit margins.

Forecasts. We cut our FY23-24F earnings forecasts by 34% and 15%, respectively.

Consequently, we reduce our TP by 6% to RM0.75 (from RM0.80) based on a rolled forward FY24F EPS (from FY23F), pegged to an unchanged PER of 15x which is 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).

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, its prospects in the immediate term remain unexciting owing to waning demand for its products and the deferment of its new projects. Maintain MARKET PERFORM.

Risks to our call include: (i) a sooner-than-expected turnaround in the automotive sector, (ii) rising orders at its industrial segment on the back of a strong recovery of the global economy, and (iii) new products hitting mass production earlier than expected.

Source: Kenanga Research - 1 Jun 2023