• Maintain BUY, new MYR0.98 TP from MYR0.85, 28% upside with c.1% FY24F yield. 1H23 core earnings missed expectations on the industrial segment’s losses and margins compression dragged by higher input costs and product mix. While the semiconductor-related business’ recovery pace may be a gradual one, JHM Consolidation’s new automotive customer is expected to contribute significantly in FY24 and current valuation is undemanding, considering the relatively strong automotive orders visibility.

• Missed expectations. 1H23 revenue of MYR185.5m (-3.9% YoY) was largely in line, but core profit of MYR3.7m (-57.5% YoY) came in at only 13.4% and 12.5% of our and Street’s estimates. The deviations were due to prolonged loss-making in the industrial segment amid the semiconductor downturn, coupled with lower product mix margins and higher labour costs.

• A stronger 2Q23. Core profit of MYR1.8m improved YoY from a slight loss of MYR0.5m in 2Q22, but was down 8.3% QoQ due to lower product mix margins. Note: We stripped off the MYR2.7m disposal gain and MYR3.5m recognition of profit guaranteed shortfall from 2Q22 numbers – alongside the unrealised FX gains – to arrive at our core profit computations.

• Hoping for a better 2H23. Based on historical trends, 2H of a given year tends to be stronger, but we expect the industrial segment (c.30% revenue) to remain challenging this time due to the prolonged global slowdown in the overall semiconductor and E&E sectors, which are affecting the utilisation rate and economies of scale. However, we think the automotive segment is expected to be stable before seeing significant growth in FY24. Nonetheless, we are hopeful for timely contributions from new projects post the expansion of two new high-end surface mount technology lines.

• Project updates. The operation set-up for 55%-owned JHM-Dekai Auto Lighting is completed and now under audit before the commencement of a new full-lamp assembly for a national car brand by 3Q23. An estimated revenue of c.MYR8-10m in FY23 is expected and set to grow by 3-4x in FY24-25. Elsewhere, the hermetic glass seals project remains laborious – causing the margins compression. Meanwhile, the plant expansion in Batu Kawan will be further delayed pending commitments from a potential client.

• Forecasts and ratings. Post results review, we cut our FY23F-25F numbers by 63-10.1% as we factor in a prolonged slowdown in overall semiconductor demand and cost escalations. We roll forward our valuation base year to FY24F, based on an unchanged mean valuation of 18x P/E. This results in a higher MYR0.98 TP, which includes a 4% ESG premium, ie it is above the country median ESG score of 3.0.

• Key risks: Lower demand, cost escalations, a stronger MYR, and delays in new project executions.

Source: RHB Securities Research - 29 Aug 2023