• Stay BUY, new MYR0.78 TP from MYR0.85, 18% upside with c.3% FY25F yield. JHM Consolidation’s 1Q24 core loss of MYR5.1m was a miss on slower-than-expected revenue and margin. The push-out of new projects launched by customers affected the overall utilisation rate and, coupled with higher input costs, contributed to the lacklustre results. We expect the automotive side to pick up in 2H alongside the industrial segment from the semiconductor sector’s recovery. The current distressed price level presents opportunities for longer-term investors to position for the recovery.

• Below expectation. 1Q24 revenue of MYR48.5m (-46.1% YoY) and core loss of MYR5.1m (1Q23: MYR1.3m profit) came below our and Street’s estimates. The significantly lower performance from the automotive segment (-63.5% YoY) and slow industrial business (-6.7% YoY) undermined overall capacity utilisation and absorption of fixed costs. These, coupled with higher labour and utility costs, dragged JHMC into a loss.

• Earnings were affected by higher costs despite elevated revenue (+7.7% QoQ; mainly on a stronger industrial segment), but the group dipped into the red due to loss of economies scale, absorption of fixed costs, and additional overhead costs from the expansion plan in anticipation of a recovery in 2H24. Overall utilisation was at c.40%. As anticipated, JHMC is experiencing a slow start to FY24 due to the hiatus between the commencement of new projects (due to delays in model launch by end-customers) and end-of-life for certain models in the automotive segment.

• A better 2H24. We should see a much better 2H24, as the industrial segment is set to see a significant pick-up from the anticipated recovery in the semiconductor and E&E sectors. This is further supported by the maiden contributions from JHMC’s new major automotive customers, which should set the base for the earnings recovery thereafter – this is given the stickiness of automotive projects in general. Meanwhile, the operations set-up for JHM-Dekai Auto Lighting is now completed and should go into light assembly in the coming quarter to support the local automotive maker sector with an initial revenue contribution of c.MYR8-10m pa. Management guided that the utilisation rate at the machining side remains subpar at this time, while a hermetic glass seals project is currently idle pending customer’s loadings.

• Forecasts and ratings. We cut our FY24F-26F earnings by 80%, 33%, and 20%, as we lower revenue growth assumptions due to the push-out of new projects and slow recovery in the business. Consequently, our TP is lowered to MYR0.78 as we roll forward our valuation base year to FY25F based on unchanged 18x P/E (at mean level). Note: Our TP is inclusive of a 2% ESG premium, given that JHCM’s ESG 3.1 score is above the country median.

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

Source: RHB Research - 28 May 2024