• BUY, new MYR0.85 TP from MYR0.98, 14% upside with c.1% FY24Fyield. JHM Consolidation’s 9M23 core earnings of MYR10.4m (-10.1% YoY)beat our estimate but missed the Street projection, due to higher-thanexpected margins. Lower revenue from the industrial unit and narrowermargins dragged its YoY profitability. While we expect its 4Q23 numbers totone down amid the United Auto Workers (UAW) strike in the US, investors’likely tepid outlook may engender a potential rebound in 2024 – supportedby a recovery in the industrial segment and new customer contributions.

• Results beat our expectation, but fell below consensus estimate. 9M23revenue of MYR265.7m (-1.2% YoY) led to a core profit of MYR10.4m(-10.2% YoY), at 102.7% of our but only 49.1% of the Street’s full-yearforecast. The outperformance vs our estimate was mainly driven by astronger-than-expected margin from the automotive segment, thanks tostringent cost control and favourable FX rates. The lower profitability wasdragged by prolonged losses in the industrial segment amid the chip sector’sdownturn, compounded by higher labour costs.

• Better profitability in 3Q. 3Q23 revenue fell 16% QoQ, mainly on theslowdown in automotive orders, partially cushioned by a strongercontribution from the industrial unit. However, revenue grew 5.6% YoY fromstronger automotive orders, even though industrial unit dragged this metric.Core profit of MYR6.7m surged 130.9% YoY and 280% QoQ, after adjustingfor unrealised FX loss/gain on better cost control and favourable FX rates.

• Slower 4Q but a better FY24. We expect the 6-week UAW strike that startedmid-September to affect JHM’s 4Q23 and, partially, 1Q24 orders in theautomotive segment – thereby bucking the historical trend of stronger ordersbeing taken in 2H. Similarly, the industrial segment continues to see a lowutilisation rate due to the prolonged global slowdown in the overallsemiconductor and E&E sectors. Nonetheless, we are optimistic on FY24F,on the new contributions from new customers in the automotive unit and arecovery of orders in the industrial segment.

• Project updates. The operation set-up for JHM-Dekai Auto Lighting is nowcompleted and currently undergoing customer audit. The commencement ofthe full-lamp assembly of a high-volume national car model will start in 1Q24,with an initial revenue contribution of c.MYR8-10m, which may grow toMYR30-40m by FY25. Elsewhere, production at the hermetic glass seals andmachining side remains subpar, dragging overall group margins.

• We raise FY23F earnings by 13.7% on stronger margins, but cut FY24-25Fnet profit by 12% and 11% to factor in the push-out in mass productionschedule by its new key customer amid the delay in new model launches.Our new MYR0.85 TP is based on an unchanged 18x FY24F P/E (meanlevel), inclusive of a 2% ESG premium. Note that we also lower the ESGscore to 3.1 (from 3.2) to account for the non-disclosure of its emissions data.

• Key downside risks: Lower demand, cost escalations, a stronger MYR, anddelays in new project execution.

Source: RHB Securities Research - 27 Nov 2023