• Keep BUY and MYR0.85 TP, 22% upside, c.1% yield. FY23 core earnings beat our estimates but missed Street’s due to JHM Consolidation’s stronger- than-expected industrial segment. Slower revenue and loss of economies of scale, coupled with higher input costs dragged FY23 profitability. Current below-mean valuation vis-à-vis a potentially better FY24 makes JHM a BUY, given the potential rebound from the industrial segment’s recovery – amid the bottoming out of the semiconductor sector – and contributions from new major customers in the automotive segment.

• Above our expectations but below consensus’. FY23 revenue of MYR310.7m (-12.7% YoY) and core profit of MYR14.1m (-35.0% YoY) exceeded our forecasts at 123.3% but was at only 70% of Street’s. The outperformance vs our estimate was mainly due to a better performance from JHM’s industrial segment and favourable FX rates. Overall FY23 profitability was undermined by weakness in the industrial segment amid the chip sector’s downturn, compounded by a slowdown in the automotive segment. This was in addition to higher labour and utility costs, coupled with the loss of economies scale.

• Weak 4Q. 4Q23 revenue fell 41.5% QoQ and 52.3% YoY on the slowdown in automotive orders and 6-week United Auto Workers (UAW) strike that began in mid-Sep 2023. This was partially cushioned by the industrial unit’s stronger profitability, on the back of stringent cost controls. MYR3.8m core profit was down 63% YoY and 43% QoQ post adjustments for unrealised FX losses/gains.

• Slow start to FY24. The overall lacklustre E&E sector and disruptions from the 2023 UAW strike should continue to impact 1Q24 orders in the automotive segment. The industrial segment is still seeing low utilisation rates with a more significant pick-up only expected in 2H24 due to the prolonged global slowdown, as the semiconductor sector has showed signs of bottoming out. Maiden contributions from its new major automotive customers have been pushed out to 2Q/3Q and we should see better earnings trajectory thereafter.

• Project updates. The operation set-up for JHM-Dekai Auto Lighting is now completed and should go into light assembly in the coming quarter, with an initial revenue contribution of MYR8-10m pa – it is expected to reach MYR30- 40m in 1-2 years. The utilisation rate at the machining side remains subpar, while the hermetic glass seals project is pending customers’ loadings. Note that JHM has exited the 30% JV with Mass Precision to consolidate its resources to grow its organic business.

• Forecasts and ratings. Maintain our earnings forecasts, aside from a minor model-up keeping exercise. Our MYR0.85 TP is based on an unchanged 18x FY24F P/E (mean level), inclusive of a 2% ESG premium. Note that we lowered JHM’s ESG score to 3.1 (from 3.2) for the non-disclosure of its emissions data.

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

Source: RHB Research - 29 Feb 2024