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 - 2 Dec 2019