For 4Q19, HPMT registered core PATAMI of RM2.3m (QoQ: -10.4%, YoY: NA), bringing the core net profit to RM9.1m in FY19 (YoY: -25.3%); this is in-line with our expectations, forming 95.4% of our full year forecast. Raw material price was fairly stable in 4Q19 to date and no new capacity was installed in 4Q19. On the outlook, should the unresolved trade war and Covid-19 situations persist, we believe it may pose a downside risk towards the demand for HPMT’s products moving forward. Nevertheless, we maintain our forecasts and BUY rating with unchanged TP (based on FY20 core EPS of 3.4sen pegged to 13.5x PE) of RM0.46.

Within expectations: 4Q19 core net profit of RM2.3m (QoQ: -10.4%; YoY: NA) brought the full year sum to RM9.1m (YoY: -25.3%), which met our expectations, accounting for 95.4% of full year forecast. Note that the FY19 core net profit was derived after removing listing expenses of RM1.23m which was booked in 2Q19.

Dividend: Third interim dividend of 0.375 sen was declared in 4Q19 (ex-date: 10th Mar 2020), bringing the total dividend to 1.25 sen for FY19.

QoQ: In 4Q19, revenue fell 6.9% to RM18.3m as a result of cautious buying behaviour from its distributors due to the uncertain global outlook on the back of the prolonged trade war environment; especially slower demand from Asia region. In turn, core net profit declined by 10.4%.

YTD: Similarly, FY19’s top line and core net profit declined 7.8% and 25.3%, respectively, mainly due to the trade war environment, which contributed to softer demand throughout FY19 on the back of cautious buying patterns by the distributors and end-users throughout the year.

Outlook: As average raw material price (tungsten carbide) did not fluctuate much from 4Q19 till to date, we think cost per unit for HPMT will be fairly manageable, at least for 1Q20. Meanwhile, no new capacity was being added in 4Q19 and management will depend on market conditions before setting up new machineries in FY20. Given the protracted trade war environment, coupled with the recent Covid-19 outbreak situation, we believe it may pose potential slowdown in global economic activities as some factories in China are still shut (albeit reopening on a staggered basis). Should both these events persist further, we believe it may pose a key risk to the demand for HPMT’s products moving forward.

Forecast: Unchanged as the Results Are in Line.

Maintain BUY with unchanged TP of RM0.46. We maintain our BUY rating with an unchanged 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 2-years (Halcyon Tech at 11.5x and NS Tool at 16.8x).

Source: Hong Leong Investment Bank Research - 20 Feb 2020