Case Study of JHM Consolidation Berhad (0127)

By Stella Goh – Market Data Analyst | 22 January 2020

Overview 

JHM Consolidation Berhad (JHM) is an established Malaysia-based company founded in 2005 and headquartered in Bayan Lepas, Malaysia. JHM is a one stop solution provider for high precision, high speed stamping, including tooling design, fabrication as well as production of Micro-Electronic Components (MECs).  

JHM was listed in ACE Market in Year 2006 and is seeking to transfer their listing quotation for entire issued share capital to Main Market of Bursa Malaysia by third quarter of this year. (The Star Property, 1Jan2020). Geographically, the company exports its products to People’s Republic of China, United States of America, United Kingdom and Singapore. 

There are 6 wholly subsidiaries of JHM such as Morrissey Technology Sdn Bhd (MTSB), Morrissey Assembly Solutions Sdn Bhd (MASSB), JH Morrissey Sdn Bhd (JMSB), Morrissey Mettalurgy Manufacturing Sdn Bhd (MMMSB), Morrissey Integrated Dynamics Sdn Bhd (MIDSB) and Mace Instrumentation Sdn Bhd (MISB). 

Business Model 

JHM principally engaged in the manufacturing of precision miniature engineering metal parts & components, assembly of electronic components by using surface mount technology (SMT), assembly of automotive rear lighting for well-known car manufacturers in North America countries as well as in Japan, and production on high brightness of emitting diodes (HB LED) application to support 3D effects. 

The group also involved in the broad portfolio of innovative equipment, services and niche products for aerospace. They design, SMT production and assembly of interior lighting for aerospace. 

Financial Review 

Based on the past 5 financial years of revenue chart above, the group’s revenue grew year-on-year (y-o-y) from FY2014 (+3.45%), FY2015 (+82.86%), FY2016 (+47.51%), FY2017 (+27.03%) to FY2018 (+7.57%). On a CAGR basis, JHM has grown 30.69% based on 5 years. The increase in revenue was mainly attributed to 71% for Automotive Segment Industry, 28% for Industrial Products and 1% for others. 

JHM has successfully recorded RM3.965 million increase in gross profit, translating to a growth of 6.99% from RM56.7 million in FY2017 to RM60.7 million in FY2018. Based on five years CAGR basis, the group has grown 48.94%. The increase in gross profit was due to the contribution from Mace instrumentation Sdn Bhd (MISB), growing of automotive sectors, results from Mechanical Business Unit and unrealized gain on foreign exchange of RM2.22 million in FY2018.    

The Profit After Tax (PAT) of JHM rose 19.60% from RM29.6 million in FY2017 to a new high of RM35.4 million in FY2018. On CAGR basis, the Profit After Tax (PAT) grew by 77.30% was in line with the growth of revenue and gross profit.

Cash Flow Statement 

The net cash from operating activities has obtained a positive cash flow of RM26.0 million in FY2018 compared to RM17.1 million in FY2017 indicates that the company is healthy and have enough cash used for business expansion. 

The net cash from investing activities in FY2018 is (-RM12.7 million) was mainly due to purchase of Property, Plant and Equipment (PPE) (RM8.5 million), net cash outflow from acquisition of a subsidiary (RM3.9 million), acquisition of non-controlling interests (RM1.5 million) and placement of fixed deposits (RM0.158 million). The negative cash flow indicates that the company is investing more in its business to grow. 

The net cash from financing activities in FY2018 is (-RM10.8 million) was mainly due to the payment of finance lease (RM15.7 million) and dividends paid (RM8.4 million).  

Is the company able to pay back its liabilities?  

Based on my liquidity ratio calculation, JHM has a current ratio of 2.858 times in FY2018 indicating that the company does not face any liquidity issue as it is capable of paying back its liabilities if any unforeseeable circumstances occur. JHM is able to do so by using current assets such as inventories, trade receivables, other receivables, deposits, prepayments, tax recoverable, cash and bank balances amounted to RM182.7 million. 

Prospect and Challenges 

JHM was buying a factory in Kedah for RM16.6 million by cash and the group have signed the sale and purchase agreement (SPA) with Bernas Wirama Sdn Bhd. The acquisition will enable JHM to expand their production floor in order to increase their production capacity. The board views it as a strategic move for JHM group to own the property, to improve and enhance the operational efficiencies in long-term. (The Edge, 2 April 2019).  

On 26 March 2019, JHM has entered a two years Memorandum of Understanding (MoU) with Universal Alloy Corporation Europe (UACE) in order to create an efficient and effective supply chain for machined sub-assembled aerospace components and products. UACE will provides technical and manufacturing capabilities insertion programs as and when needed by JHM. They understand that the MoU is one of four signed as part of strategic objectives of Malaysia’ National Policy on Industry 4.0 for Industry 4WRD. They noted that there was also another MoU signed between JHM and MTC AeroSystems of Hungary to supply software systems for JHM. (The Edge, 28 March 2019).  

Rating System

Return on Equity (ROE) = Average 

Revenue [5 years CAGR] = Good 

Net Earnings [5 years CAGR] = Excellent 

Basic Earnings per Share (EPS) [5 years CAGR] = Excellent 

Interest Coverage = Good 

My Insight 

Based on my calculation on Discounted Earnings Model, JHM Consolidation Berhad has a fair value of RM4.372. The current market value of JHM is RM1.68 which is undervalued (Based on 20Jan2020). JHM has a beta of 1.659 (500 days) indicates that the company is more volatile than current market, which means the investors / traders are actively trading in this stock. While for short-term trader, they may face higher risk. Based on my computation of Compound Annual Growth Rate (CAGR), JHM has an expected market return of 5.54%. 

In conclusion, JHM Consolidation Berhad has achieved an outstanding performance in FY2018 as the revenue, gross profit and net profit after tax (PAT) have been increased years by years from FY2014 to FY2018. JHM’s prospect remains bright will be supported by vibrant automotive segment, and by industrial segments such as gradual and steady take-off strategic aerospace segment, especially after the successful qualification of initial sample parts. I believe the company can grow very well in the future as the Industry 4.0 will need a lot of high-end equipment to test and automate. 

Disclaimers 

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