JHM Consolidation extends share price gain

Its automotive and industrial segments are poised for strong growth from new projects and the company’s expansion plan


JHM Consolidation Bhd extended its gain this year as the rally in tech-related stocks continues to be fuelled by expectations of higher demand for telecommunication chips, laptops and semiconductor devices in cars.

Its share price has more than tripled since the Movement Control Order was first imposed on March 18 last year, rising from 60 sen to RM2.26 at close yesterday. The company is currently valued at RM1.26 billion.

RHB Investment Bank Bhd (RHB Research) yesterday upgraded the stock to ‘Buy’ from ‘Neutral’, with a higher target price of RM2.74 from RM1.91 previously.

RHB Research senior equity analyst Lee Meng Horng in a note yesterday attributed the upgrade to an upward earnings revision as the company’s automotive and industrial segments are poised for strong growth from new projects and the company’s expansion plan.

“We believe the higher valuation is justified, given its multi-pronged earnings growth profile and potential rerating following its successful main board migration,” Lee said, adding that key risks for the stock include lower than expected demand, stronger than expected ringgit and order delays.

JHM Consolidation in December acquired a 5.59-acre (2.26ha) leasehold industrial land in Batu Kawan, Penang, for RM27.1 million to expand its business into the manufacturing of telecommunication equipment.

Lee said the land acquisition has huge prospects as it is mainly to expand the industrial segment in high-precision mechanical engineering and surface-mount technology production lines with a 170,000 sq ft manufacturing facility.

“We are positive on the prospects of the expansion, as the manufacturing facility mainly caters to a new US customer who is involved in the largest photonics and compound semiconductor companies,” Lee said.

He, however, noted that the group elected to purchase the land from a secondary market and thus, is paying a higher price for the time advantage to meet tight timelines required by the new customer.

“The implied land cost of around RM111 per sq ft is above the RM55 per sq ft price quoted on Penang Development Corp’s website, but within the range of past transactions in Batu Kawan Industrial Park. A previous freehold land acquisition by Columbia Asia in 2017 was at around RM130 per sq ft,” Lee said.

Lee said the expansion prospects are sizeable given that the client is a global leader in engineered materials, optoelectronic components and optical systems with presence in 18 countries.

“The customer generated a US$2.6 billion (RM10.48 billion) revenue for the financial year 2020, with around 70% from fibre optics and wireless communication, and the rest from automotive aerospace and life sciences.

“This will enable JHM Consolidation to expand into telecommunication equipment and other semiconductor-related segments, tapping into the growth of electric vehicles, Internet of Things, cloud or data centres, and 5G,” he said.

On total capital expenditure requirements, potential revenue and order size, the research house is awaiting more guidance, as the company’s gearing level is expected to rise to 13% from 0.5% on a pro forma basis, before taking construction and machinery costs into account.

“We continue to like the company for its earnings recovery and growth prospects in the new business venture, as well as this new expansion plan.

“However, the risk-to-reward ratio at current valuation is less attractive, following the strong share price run-up over the past months, and against the backdrop of the strengthening ringgit against the US dollar,” he said.