Kenanga Research & Investment

JHM Consolidation - Sits Out Year-end Order Surge

Publish date: Thu, 29 Feb 2024, 11:03 AM

JHM’s FY23 results met our forecast but disappointed the market.  Its 4QFY23 core net profit plunged 41% on a 44% drop in revenue on the back of reduced orders amid the United Auto Workers strike.  It guided for a challenging outlook on lumpy fixed costs from its under-utilised new assets. We maintain our forecasts, TP of RM0.70 and MARKET PERFORM call.

Within expectations. JHM’s FY23 core net profit of RM14.4m (-33% YoY) met our forecast but missed the consensus estimate by 29%.

YoY, JHM’s FY23 top line eased 12.7% owing to lingering weakness at the industrial segment (-30.6%) while the automotive segment recorded a flattish (-0.5%) performance. The industrial segment, operating below optimal levels, continued to report losses attributable to under-utilised floor space. Its automotive segment's profit fell 27% due to poor cost absorption from new products that had yet to be scaled up to the mass production phase QoQ, its 4QFY23 core net profit declined 41.4% on a 44% drop in revenue due to a slump in automotive orders during a typically robust year-end period. JHM attributed this anomaly to the United Auto Workers strike in Oct 2023, hurting order for LEDs used in US-brand vehicles.

Challenges remain. The prevailing challenges of the global economy are persistently impacting the group, notably on its industrial segments. This is primarily attributed to a decrease in demand for sheet metal fabrication and CNC machining, both crucial components serving the semiconductor industry. In addition to fluctuating orders from its bread- and-butter automotive segment, the group also faces challenges of poor cost absorption from under-utilised assets, including: (i) the hermetic glass seal business, (ii) collaboration with Jiangsu Dekai Auto Parts Company Ltd for headlamp assembly, and (iii) the joint venture with Mass Precision Inc for front-end equipment fabrication

Forecasts. We maintain our FY24F forecasts and introduce our FY25F numbers.

Valuations. We keep our TP at RM0.70 based on an unchanged FY24F PER of 15x, representing a c.15% discount to the average forward of its peers such as NATGATE, PIE and CNERGEN to reflect its longer lead time to ramp up new projects. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. 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 the under-utilisation of its new assets. 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 Feb 2024

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