For 3Q19, core PATAMI stood at RM2.6m (QoQ: +83.8%, YoY: NA), bringing the 9M19 sum to RM6.8m (YoY: NA); this is above our expectations, forming 80.3% of our full year forecasts of RM8.5m. We believe with the year-end replenishment activities by their distributors, coupled with the additional capacity installed and commenced in 3Q19, this may give rise to potential earnings recovery moving forward. We forecast HPMT’s core PATAMI at RM9.5m, RM11.1m and RM12.4m for FY19-21 and derived a TP of RM0.46 based on FY20 core EPS of 3.4sen pegged to 13.5x PE.

Above expectations: For 3Q19, core PATAMI stood at RM2.6m (QoQ: +83.8%, YoY: NA), bringing the 9M19 sum to RM6.8m (YoY: NA); this is above our expectations, forming 80.3% of our full year forecasts of RM8.5m. Note that the 9M19 core PATAMI figure has been derived after removing listing expenses (RM1.23m) which was booked into 1H19 results.

Deviations: The stronger-than-expected results were largely due to lower raw material (tungsten carbide) price, which dropped more than 10% YTD.

Dividend: Second interim single tier dividend of 0.375 sen per share in 3Q19 (ex date: 12th Dec); YTD: 0.875 sen.

QoQ: HPMT registered flattish revenue of RM19.4m in 3Q19 (similar to 2Q19) as a result of cautious buying pattern from its distributors due to the uncertain global economic outlook. Meanwhile, the stronger core PATAMI (+83.8%) was mainly due to lower raw material prices in 3Q19. There is no YoY comparison for 3Q19 and YTD as HPMT was only listed this year.

Outlook: Based on the declining trend of the raw material (tungsten carbide), coupled with the year-end replenishment activates by their distributors, we believe this may give rise to a potential recovery in earnings for 4Q19. Do note that 3 additional CNC machines were installed and commenced in 3Q19 which contributes additional capacity of 1.5k-2k pieces per machines per month; this increases the full year capacity by 1.9% from 1.66m cutting tools per annum in FY18 to 1.69m cutting tools per annum in FY19. Having said that, should the US-China trade war persist, this presents a key risk to demand.

Forecast: In our previous forecast, FY19-21 core PATAMI stood at RM8.5m, RM10.0m and RM11.6m. However, with the stronger-than-expected 9M19 results, we revise our FY19-21 core PATAMI forecasts higher by 6.6-12.2% to RM9.5m, RM11.1m and RM12.4m, respectively, largely imputing lower raw material price and additional capacity from the 3 newly added CNC machines.

BUY rating, TP: RM0.46. Following the earnings adjustments, we derive a TP of RM0.46, based on FY20 core EPS of 3.4sen pegged to 13.5x PE. The 13.5x PE multiple applied is in midway between its peers’ mean PE over the past 3-years (Halcyon Tech at 10.6x and NS Tool at 16.5x). We reckon that the stock is worth a revisit following its sequential earnings recovery in 3Q, which is likely to sustain into 4Q as well.

Source: Hong Leong Investment Bank Research - 25 Nov 2019