JHM Consolidation Bhd
(March 27, RM1.31)
Maintain buy with an unchanged target price (TP) of RM1.44, with 12% upside plus 2% yield. We are positive on news of a memorandum of understanding (MoU) signed between Universal Alloy Corp Europe (UACE) and JHM Consolidation, marking a milestone in the latter’s long-awaited plans to diversify into the aerospace sector. This should be a game changer and rerating catalyst for sector top pick JHM. We keep our forecasts and TP pending further details from management next week. We are the only broker covering this stock.

 
On March 26, JHM entered into a two-year MoU with UACE whereby the latter will outsource metal machining and sub-assembling of aerospace products to the former. UACE will also provide technical and manufacturing capability insertion programmes as and when needed to JHM. The two will collaborate to create an efficient and effective supply chain for machined sub-assembled aerospace components and products. We understand this MoU is one of four signed as part of the strategic objectives of Malaysia’s National Policy on Industry 4.0 for Industry 4WRD. We note there was also another MoU signed between JHM and MTC Aerosystems of Hungary to supply software systems to the company.

We understand the MoU was signed as a precursor to a subsequent detailed contract agreement. This agreement, which is expected to be finalised by 2Q19, should be a long-term contract spanning more than 10 years — the norm for the aerospace industry. While the contract value was not made available at this moment — pending discussions between the two parties — we believe the contract will be significantly earnings-accretive for JHM. This is once material earnings kick in over the next few years.

UACE is a global supplier of aerospace components with a vertically integrated value chain that incorporates casting, extrusion, machining, surface treatment, kitting, and assembly. It serves manufacturers and their subcontractors in eastern US. The company was founded in 2009 and is based in Maramures, Romania. It has hard alloy extrusion mills in North America and Europe.

Our forecasts and RM1.44 TP — based on 18 times forecasted financial year 2019 (FY19F) price to earnings (P/E) — remain unchanged for now, pending further details from management next week. This is because there is no contract value for us to ascertain the accretive value for at this juncture. We are of the view that a successful venture into the aerospace industry should be a game changer and rerating catalyst for JHM. — RHB Research Institute, March 27