HPMT’s recovery in FY21 is firmly in motion with higher utilisation rates seen in 1Q21, within management’s guidance of 65-75%. Demand recovery is driven by restocking activities by distributors after laying low last year. Raw material costs pressure should also pass through given stronger demand. On the whole, expansionary manufacturing activities in key markets bode well for HPMT’s products. We tweak upwards FY21-22 earnings by 2-6%. Maintain HOLD rating with higher TP of RM0.62 (based on FY21 core EPS of 4.1sen pegged to 15x PE).

We Met With Management Recently With the Following Key Takeaways:

On the upswing. FY21 has so far marked a strong turnaround for the company with robust order flows for HPMT’s cutting tools seen. According to management, pace of orders experienced this year is roughly reflective of FY 18/19. We gather that its 1Q21 utilisation came in at c.65% as order upswing picks up this year (4Q20: 60%; FY20: 50-60%). The upswing is largely driven by restocking activities by distributors on the back of recovery optimism having run low inventory levels last year. In tandem with this, management’s FY21 65-75% utilisation guidance is maintained.

Adding machines. Buoyed by recovery this year, HPMT is looking to add another 2 CNC machines to their current portfolio of 56 units in 2022. However, such plans would be largely dependent demand appetite by year end. The acquisition of such machines would also help lower tax rates via capital allowance. Recall that the company has previously put off its machinery acquisition plans since the pandemic outbreak with its most recent purchase in 2018.

Manageable costs pressure. To our knowledge, HPMT’s main raw material, tungsten carbide has so far increased by c.15% in 1Q21. Nonetheless, we believe HPMT normally keeps on hand roughly three months of materials which should allow the company to pass through cost increase, mitigating impact on margins. The healthier market for cutting tolls this year should facilitate a more efficient cost pass through.

Encouraging manufacturing sentiment. Bullish PMI data have so far been registered in key markets like Eurozone, China, Japan and Taiwan in 2021. Eurozone namely Germany and Italy, have shown consecutive MoM expansions. Broadly speaking, this bodes well for HPMT given that both are major contributors pre pandemic. Meanwhile, data from its Asian markets have also stayed expansionary. Despite the possible fresh lockdown in Germany, management has not sensed a noticeable deterioration in orders or sentiment amongst distributors.

Forecast. Tweak FY21-22 earnings upwards by 2.4-6.4% after updating balance sheet items and incorporating additional capacity from two machines next year. Introduce FY23 earnings of RM15.1m.

Maintain HOLD; TP of RM0.62. Maintain HOLD with higher TP of RM0.62 post tweaking earnings. We increase our targeted P/E multiple from 12x to 15x inline with FBM small cap P/E multiple and also around the trading midpoint between its comparable peers, NS Tool and Halcyon.

Source: Hong Leong Investment Bank Research - 20 Apr 2021