• Maintain BUY, new TP of MYR0.85 from MYR1.04, 15% upside with c.2% FY23F yield. JHM Consolidation’s 1Q23 core earnings fell short of expectations, due to the substantial margin compression undermined by elevated overhead and material costs, and loss from the industrial segment despite a healthy topline. We expect better 2H23 numbers on seasonality, contribution from new projects, and continued upward trajectory of automotive orders – offsetting weakness seen in the metal sheet business division before a significantly better FY24 prospect, fuelled by new projects.

• Missed expectations. Despite MYR90.1m revenue (+3.9% QoQ, -9.9% YoY) being within expectations, core profit of MYR1.9m (-78% QoQ, - 79.1% YoY) came in at only 5.7% and 5.4% of ours and consensus’ estimates. The deviations were due to significant margin squeeze undermined by elevated overhead costs, higher material costs due to FX timing impact, and industrial segment’s loss. A better QoQ performance from automotive was dragged down by the industrial segment, with EBITDA margin slumping to 8.6% (from 9.6% in 4Q22 and 16.9% in 1Q22).

• Better 2H23 in sight. Historically, 1Q is the weakest quarter for the year. We expect earnings to recover in 2H23, due to the anticipated ramp-up in automotive orders and contributions from new projects following the expansion of two new high-end surface mount technology lines. Margins should also recover after 1Q’s big hit, partially cushioned by transfer of a new printed circuit board assembly project from JHM’s Singapore customer and better utilisation of machining components division. However, the industrial segment is expected to remain challenging due to the prolonged global slowdown in the overall semiconductor and E&E sectors.

• Project updates. The 55%-owned JHM-Dekai Auto Lighting is on course to commence the new full-lamp assembly for a national car brand by 3Q23, with an estimated c.MYR10m in FY23 (set to grow 3-4x in FY24-FY25). Elsewhere, the hermetic glass seals project remains labourious – causing the margin compression. Meanwhile, the plant expansion in Batu Kawan will be further delayed pending commitment from a potential client.

• Forecasts. Post results review, we cut our FY23F-25F numbers by 18%- 7%. Our valuation is based on unchanged 18x FY23F P/E (at the 3-year mean), inclusive of 4% ESG premium, on higher than the country median ESG score. Even with the earnings cut, we believe valuation remains undemanding, considering automotive orders recovery and new projects currently undermined by slowdown in the metal sheet division. Key risks: Lower demand, stronger MYR, and delays in new project executions.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we tweaked our ESG weightage. We assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research note Envisioning a Better Future.

Source: RHB Research - 1 Jun 2023