HPMT anticipates a better FY21 with customers overall sounding a more positive tone this year. Utilisation rate target for 1Q21 is 65-75%, better than 50- 60% average for 2020 and is anticipated to improve through the year. Demand recovery should be largely broad based with industries like mould and die, precision component contributing to the recovery. We tweak upwards FY21 earnings by 8%. Maintain HOLD rating with higher TP of RM0.46 (based on FY21 core EPS of 3.8 sen pegged to 12x PE).

We Spoke With Management Recently With the Following Key Takeaways:

FY20 supported by Malaysia and Japan. In tandem with most business during this period, HPMT’s performance were impacted in FY20 with declines seen in most key geographical areas save for Japan and Malaysia. Picking up the Malaysian contribution was growth from machine tools sales to mould and die industry. On the other hand, Japan was propped up by general industrial precision component making. Needless to say, contribution from Europe (Italy and Germany) declined as both countries were more severely hit by the pandemic.

More optimistic for FY21. Management is more optimistic for FY21’s prospects with key customers overall sounding a more positive tone despite lockdowns. HPMT aims to sustain utilisation rate of 65-75% in 1Q21, an improvement over an average of 50- 60% achieved in 2020. Rates are expected to gradually improve through the year. Generally, demand recovery is to be driven by mould and die, precision component, electronic as well as automotive segment. Nevertheless, exposure to end markets is rather diversified and management believes potential chip constraints on automotive manufacturing as such would be mitigated. As for product ASPs, HPMT does not expect changes given that sales are mostly for existing product lines with no drastic pricing adjustments foreseeable.

MCO2.0. Implementation of the MCO this time around has had marginal impact on its operations having been classified as an essential service. HPMT employs 17 foreign workers which are placed in accommodations in adherence to housing requirements. The company has been encouraging customers to make orders in advance for delivery in case of a strict lockdown.

Easing Covid-19 cases. Cases are tapering off in European key markets which saw flare ups late last year. This, we anticipate should be supportive of orders recovering with further potential flare ups mitigated by effective rollout of vaccination programmes in respective countries.

Forecast. Tweak FY21 earnings upwards by 7.6% after assuming stronger orders and better margins.

Maintain HOLD; TP of RM0.46. Maintain HOLD with higher TP of RM0.46 (from RM0.39) post earnings adjustment. TP is derived from pegging FY21 EPS to higher 12x from 11x (at the lower end of its peers ) due to stronger appetite for recovery stocks. Stock offers a cyclical exposure to an eventual economic recovery but trading at FY21-22 P/E multiple of 13.4/12.9x, we believe this is priced in.

Source: Hong Leong Investment Bank Research - 5 Feb 2021