JHM expected to resume strong growth in FY19

TheEdge Wed, Feb 20, 2019 10:46am - 5 years View Original


JHM Consolidation Bhd
(Feb 19, RM1.11)
Maintain buy with a target price (TP) of RM1.19:
We expect JHM Consolidation Bhd’s upcoming quarterly results to be released on Feb 27, and stronger year-on-year (y-o-y) and quarter-on-quarter (q-o-q). We kept our “buy” call given a strong double-digit earnings growth trajectory in financial year 2019 forecast (FY19F), premised on a higher contribution from the automotive segment and the diversification into the higher margin aerospace and life sciences segments. Our TP is maintained at RM1.19, on unchanged 17 times 2019F price-earnings against a five-year historical mean of 19 times.

 
We expect core earnings for the fourth quarter of 2018 (4Q18) to be stronger y-o-y and q-o-q at within RM8 million to RM12 million, continuing a recovery trend seen in 3Q. Stronger y-o-y results can be expected from an abating component shortage issue, affecting the delivery of its automotive segment in 4Q17, as well as an extra contribution from the acquisition of Mace Instrumentation, completed in 2Q18. We also expect earnings to be stronger q-o-q on higher production for its automotive lighting.

We understand the component shortage issue affecting production has been somewhat mitigated via alternative suppliers, as proven by stronger 3Q earnings (+46% q-o-q). As such, the impact has been less of a concern since then, hence production should resume progressively to normalised levels.

Expectations for stronger earnings are also supported by a favourable rate of the US dollar against ringgit, averaging at 4.1705 in 4Q18 versus 4.0895 in 3Q18 and 4.1620 in 4Q17. Recall that about 60% of its revenue is in the greenback, so a higher indicative foreign exchange rate should benefit JHM. Besides, we understand it also enjoys a favourable contract rate compared to the one in FY17, unless there is a major fluctuation in the market rate that would trigger a revision.

We expect the company will resume its strong growth trajectory and achieve a new high in FY19, on maiden contributions from new segments such as life sciences and aerospace, expected by 2Q19 and coupled with new head and tail light projects, as well as the abating material shortage issue.

We believe a profit guarantee and business prospects from Mace Instrumentation will fuel growth prospects in FY19 as well.

Key risks are a lower-than-expected demand, a stronger-than-expected ringgit, delays in commissioning new product lines and worsening material shortage issues. — RHB Research Institute, Feb 19

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