JHM’s 1HFY23 results disappointed. Its 1HFY23 net profit plunged 75% YoY due to continued losses at its industrial segment and elevated operating cost. Meanwhile, its order replenishment remains sluggish. We cut FY23-24F net profit by 10% and 7%, respectively, reduce our TP by 7% to RM0.70 (from RM0.75) but maintain our MARKET PERFORM call.

Missed expectations. JHM’s 1HFY23 core net profit of RM3.7m (- 75.3% YoY) disappointed, accounting for only 17% and 13% of our fullyear forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from elevated operating cost and unabsorbed overheads due to sub-optimal utilisation rates. Note that our net profit has been adjusted for RM4.8m worth of unrealised forex gains due to the strengthening USD against the MYR.

Results’ highlights. YoY, JHM’s 1HFY23 top line eased 3.9% due to continued weakness at the industrial segment (-18.5%) which offset the marginal improvement in the automotive segment (+3.1%). The industrial segment, which is operating around 50% of its capacity, continued to report losses due to the underutilised floor space coupled with elevated operating cost. As a result, the group’s core net profit plunged 75.3% after deducting gains from unrealised foreign exchange because of its USD-based trade receivables.

Still challenging. JHM anticipates a challenging environment in the subsequent quarters, especially for industrial segments due to a slowdown in demand for sheet metal fabrication and CNC machining which cater to the semiconductors industry. While the automotive segment remains fairly stable, its customers are less inclined to commit to higher order volumes amidst the uncertain economic climate. As such, the group will continue to work on the qualification process of its 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.

Forecasts. We cut our FY23-24F earnings by 10% and 7%, respectively.

Consequently, we reduce our TP by 7% to RM0.70 (from RM0.75) based on a FY24F EPS, pegged to an unchanged PER of 15x, representing a c.15% discount to its 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) further deterioration of the global economic outlook, hurting demand for components from the semiconductor and automotive sectors; (ii) rising production cost, and (iii) new products fail to hit mass production sooner.

Source: Kenanga Research - 29 Aug 2023