JHM’s 9MFY23 results disappointed. Nonetheless, its 3QFY23 core net profit almost tripled QoQ on better cost control but its top line still shrank by 16%. It will continue to be weighed down by the fixed costs from its under-utilised new assets. We cut our FY23F net profit forecast by 21% but keep our TP of RM0.70 and MARKET PERFORM call.

Missed expectations. JHM’s 9MFY23 core net profit of RM10.4m (- 14.9% YoY) disappointed, accounting for only 55% and 49% of our fullyear forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from high administrative cost and unabsorbed overheads stemming from sub-optimal utilisation of its new assets.

Results’ highlights. YoY, JHM’s 9MFY23 top line eased 1.2% owing to lingering weakness at the industrial segment (-20.1%) which offset the marginal improvement in the automotive segment (+9.8%). The industrial segment, which is currently operating below optimal level, continued to report losses due to under-utilised floor space. Not helping either was the cost of sale which rose 4.5% leading to margin compression. As a result, the group’s core net profit fell 14.9% after deducting gains from unrealised foreign exchange amounting to RM3.4m because of its USDbased trade receivables.

QoQ, its 3QFY23 core net profit almost tripled (albeit from a very low base) on better cost control while its top line still shrank by 16%.

Path ahead remains challenging. The soft global economy continues to weigh on the group, particularly, its industrial segments due to a slowdown in demand for sheet metal fabrication and CNC machining which cater to the semiconductors industry. The relatively stable automotive orders are unable to make up for the higher fixed costs from its under-utilised new assets such as: (i) hermetic glass seal business, (ii) collaboration with Jiangsu Dekai Auto Parts Company Ltd for headlamp assembly, and (iii) joint-venture with Mass Precision Inc for the fabrication of front-end equipment.

Forecasts. We cut our FY23F earnings forecast by 21% but maintain our FY24F numbers.

We keep our TP at RM0.70 based on an unchanged FY24F PER of 15x, representing a c.15% discount to the average forward of its peers such as NATGATE, PIE and CNERGEN to reflect its longer lead time to ramp up new projects. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment thesis. We like JHM for: (i) its exposure to the growing automotive LED market, (ii) being a proxy to the rising demand for 5G test equipment, and (iii) the lucrative margins from its venture into hermetic glass seals. However, its prospects in the immediate term remain unexciting owing to the under-utilisation of its new assets. Maintain MARKET PERFORM.

Risks to our call include: (i) further deterioration of the global economic outlook, hurting demand for components from the semiconductor and automotive sectors, (ii) rising production cost, and (iii) new products fail to hit mass production sooner.

Source: Kenanga Research - 27 Nov 2023