This article first appeared in The Edge Financial Daily on August 27, 2019
JHM Consolidation Bhd
(Aug 26, RM1.13)
Maintain buy with an unchanged target price (TP) of RM1.75: JHM Consolidation Bhd’s first half of financial year 2019 (1HFY19) core profit of RM16.2 million (+35.1% year-on-year [y-o-y]) was broadly in line with expectations, with a stronger 2H performance being anticipated. The company has declared a second interim dividend of 0.5 sen. The stronger y-o-y results were attributed to higher contributions from Mace Instrumentation, coupled with the automotive segment’s better margin and favourable foreign exchange (forex). Our TP is based on an unchanged 18 times forecast FY20 price-earnings ratio.
JHM Consolidation’s 1HFY19 revenue of RM122.9 million (+2.5% y-o-y) and core earnings of RM16.2 milllion (+35.1% y-o-y) were broadly in line — at 36.4% of our FY19 estimate — given expectations of a stronger 2H, especially the fourth quarter (4Q), with improved contributions from its new automotive projects, and the expansion of Mace. A second interim dividend per share of 0.5 sen (year to date: one sen) was declared, going ex on Sept 17. The overall stronger y-o-y results were due to better contributions from Mace, the recovery of its automotive segment from material shortage issues, favourable forex and a better earnings before interest and tax margin driven by ongoing operating efficiency.
Its 2QFY19 core profit improved by 23.8% y-o-y on the back of better margins due to improvements in productivity and effective cost management despite flattish revenue (-1.7%). However, core profit declined 32.8% quarter-on-quarter (q-o-q) due to a different product mix, lower manufacturing overhead recovery and higher depreciation, although revenue was higher by 2.9% q-o-q.
Its top line weakened y-o-y due to the tail end of certain car models, waiting for newly acquired projects — new models and assembling of interior lighting — to ramp up. We believe some of its customers are experiencing a slowdown in automotive sales amid slower global growth. However, earnings improved y-o-y given better operating efficiency. Overall, the automotive division is expected to grow in FY19, with continued adoption of light-emitting diodes in automotive lighting.
We expect a stronger 2H, with potential contributions from the aerospace segment, new automotive projects and better contributions from Mace. The increase in floor space to 200,000 sq ft from 80,000 sq ft for Mace is to cater for large-scale equipment metal enclosure orders from a US test and equipment company.
Our forecasts remain unchanged as its results were in line. Near-term catalysts include a rerating of its aerospace venture, a transfer of its listing to the Main Market of Bursa Malaysia and a growing industrial segment. Key risks include lower-than-expected demand, a stronger-than-expected ringgit, delays in commissioning new product lines and execution risk. — RHB Research Institute, Aug 26