• Maintain NEUTRAL, new MYR0.43 TP from MYR0.52, 6% upside. JHM Consolidation’s 9M24 numbers ran into deeper losses on lower-than- expected revenue and margins – on delays in mass production of new automotive products and slower recovery in the semiconductor sector, coupled with unfavourable FX. The lacklustre business outlook remains due to project delays and a sub-optimal utilisation rate with potential turnaround only in mid-FY25. The weak outlook may have been factored in the price.

• Ran into deeper losses. 9M24 revenue of MYR140.8m (-47% YoY) and core losses of MYR25.1m (9M23: MYR10.4m profit) were below expectations due to slow revenue and low capacity utilisation across all business segments. Compounded by FX impact, the automotive segment was down 61% YoY, dragged by the postponement of new projects (delays in model launches by customers) and end-of-life for existing models – resulting in an LBIT of MYR7.9m. Similarly, the industrial segment went into deeper losses of MYR15.3m amid the slower recovery in the semiconductor industry.

• 3Q24 revenue declined by 15% QoQ (-47.1% YoY) to MYR42.4m, resulting in a core loss of MYR15.2m (-213% QoQ, reverse from a YoY profit). Low revenue from all segments due to slower recoveries and postponements have driven down the overall utilisation rate, affecting the economies scale and absorption of fixed costs. These, coupled with the unfavourable FX movements, dragged down the inventory valuation.

• New developments. Morrissey Integrated Dynamics (MID) entered into a share sale cum JV agreement on 27 Nov with MD (Xiamen) Mechanical Solutions and MD Mechanical Solutions (PG) (MD Penang) to inject the faceplate business – including transfer of equipment, technology know-how, source codes, and expertise – to MID. The agreement entails a cash consideration of MYR1.08m and issuance of new shares worth of MYR120k at MID to MD Penang, resulting in an 80:20 JV structure. This new venture is part of the strategy by management to turn around its machining business with newly acquired advanced machining and plating capabilities. Separately, JHMC recently proposed to acquire an industrial property for MYR20.9m to expand its surface mount tech (SMT) unit to support the transfer of projects to the 52% JV with Jiangxi Dekai Auto Lighting and potential new business that requires vertically integrated manufacturing process for the SMT line.

• Forecasts and TP. We now forecast a deeper loss for FY24 after lowering down revenue and cost assumptions. FY25F-26F earnings are also reduced by 18% and 15% for the same factors. Consequently, our TP is cut to MYR0.43, pegged to unchanged 17x FY25F P/E, inclusive of a 0% ESG premium/discount on a scoring of 3.0. Downside/upside risks include lower/stronger demand, cost escalation/decline, a stronger/weaker MYR, and delays/new project wins in project execution.

Source: RHB Securities Research - 29 Nov 2024