For 1HFY20, HPMT registered core PATAMI of RM2.6m declining by 38% YoY; this was within our expectations, forming 39% of our full year forecast. Going forward, management intends to focus on improving cost efficiency and eventually benefit from a gradual economic recovery. Maintain forecasts. Maintain BUY rating with same TP (based on FY21 core EPS of 3.5sen pegged to 12x PE) of RM0.42.

Within expectations. HPMT reported 2QFY20 results with revenue of RM17.5m (- 1.3% QoQ, -9.8% YoY) and core PATAMI of RM1.6m (+65.7% QoQ, +11.5% YoY). This brings 1HFY20 earnings to RM2.6m, declining by 38.4% YoY. The result accounts for 39% of our full year forecasts, which is within our expectations.

Dividend. DPS of 0.50 sen going ex on 9 Sept-2020 was declared for the quarter (1HFY19: 0.50 sen).

QoQ/YoY. QoQ and YoY, core earnings increased by 65.7% and 11.5% respectively despite weaker revenue growth (-1.3% QoQ, -9.8% YoY) as margins improved on the back of implementing cost efficiency measures further boosted by government subsidies for wages. This negated the impact of lower revenue contributions as we gather operations only resume towards end-April.

YTD. Core earnings declined -38.4% mainly due to the imposition of MCO which significantly disrupted operations resulting in revenue contracting by -14.8%. Adding to this, the group saw cautious buying patterns due to the global pandemic breakout.

Outlook. While lockdowns are gradually being lifted, recovery in global economic activities beyond the initial rebound looks rather tepid. Management remains cautious citing the yet to be ascertained economic impact of the pandemic as well as ongoing US-China trade tensions. Given HPMT’s cyclical demand profile, management intends to focus on improving cost efficiency and eventually benefit from a gradual economic recovery. As part of this, HPMT intends to explore cheaper logistics alternatives including shipping to reduce its costs. Plans for capacity additions have also been delayed to FY21 to conserve cash amidst lingering demand uncertainty.

Forecast. Maintain forecasts as earnings are inline.

Maintain BUY; TP of RM0.42. Maintain BUY with same TP of RM0.42. TP is derived from pegging FY21 EPS to 12x (at the lower end of its peer’s mean PE over the past 2-years; Halcyon Tech at 11.5x and NS Tool at 16.8x). Stock offers a cyclical exposure to an eventual economic recovery.

Source: Hong Leong Investment Bank Research - 27 Aug 2020