• Maintain BUY, new MYR1.04 TP from MYR2.39, 23% upside. We think the worst is over and FY23 will be when JHM Consolidation resumes its growth path after two highly disruptive years. This is on: i) An upsurge in orders for its automotive lighting business amid stronger demand (supported by maiden contributions from major new projects) and ii) a potential earnings breakout year in FY24. Valuations are undemanding at 15x FY23F P/E vs indirect peers in technology, electronics manufacturing services or EMS, and engineering support spaces.

• Automotive. Management expects earnings to recover significantly in 1H23 on fulfilment of backlogged orders from its largest client amid improvements seen in automotive sales. JHM is currently expanding Plant 6 facilities to include two new high-end surface mount tech lines (existing seven lines) to support LED module production for a new Japanese customer, which amounts to aggregate revenue of MYR200m for FY23-26. Elsewhere, 55%-owned JHM-Dekai Auto Lighting will commence the new full-lamp assembly for the national car brand by 3Q23 with an estimated MYR10m in FY23 alone (set to grow to MYR30-40m in FY24-FY25).

• The industrial segment should be supported by multiple new projects in mechanical machining components, hermetic glass seals, printed circuit board assembly (PCBA), and metal sheet divisions. The major project win includes the transfer of a new PCBA project from JHM’s Singapore customer with an annual growth of MYR15-20m. The machining components should also show significant improvement from a FY22 loss position on better utilisation rates. This should more than offset the weaker visibility for semiconductor-related customers in the metal sheet wing.

• Other updates. The overall utilisation rate remains healthy (c.70%) while margins are set to remain stable despite higher staff costs due to the minimum wage policy and continuous R&D expenses (given the better economies of scale). The electricity tariff’s rise is also negligible, as the bulk of JHM’s plants are not in the high-voltage user category. Labour shortages are also not a concern, as locals remain sticky owing while JHM has been able to secure the needed foreign workers. Management guided that its Batu Kawan plant expansion will be delayed, as potential clients are unable to commit on the loadings amid market uncertainties (potential recession).

• Forecasts and rating. Post the results briefing, we reintroduce the new FY23F-25F earnings in this report. Our new TP is based on 18x FY23F P/E (at the 3-year mean), inclusive of a 4% ESG premium, given that JHM’s score is higher than the country median. The currently below sector valuations is a buying opportunity, as JHM will resume its growth path in FY23 with the recovery in orders for automotive lighting and various new projects in the automotive and industrial segments starting to contribute after the long incubation period. Key risks: Lower-than-expected demand, stronger-than-expected MYR, and delays in new project executions.

Source: RHB Research - 7 Mar 2023