HPMT’s 1QFY21 core PATAMI of RM3.2m (-8.7% QoQ, +234.9% YoY) was within expectations. Topline recovery was driven by restocking activities by distributors on the back of recovery optimism. External sales orders have sustained with strong manufacturing activities seen in key EU markets. Nonetheless, domestic orders have weakened in the past two weeks due to escalating cases but should pick up once cases dwindle. Maintain forecasts. Upgrade to BUY with unchanged TP of RM0.62 post-share price weakness. Stock offers a cyclical exposure to recovering manufacturing activities. TP is derived from pegging FY21 EPS to 15x P/E multiple.

Within expectations. HPMT reported 1QFY21 results with revenue of RM22.1m (+21.8% QoQ, +24.8% YoY) and core PATAMI of RM3.2m (-8.7% QoQ, +234.9% YoY). The result accounts for 24% of our full year forecasts, which is within our expectations.

Dividends. DPS of 0.4 sen going ex on 3 June-2021 was declared for the quarter (1QFY20: nil).

QoQ. Core earnings declined by -8.7% despite robust revenue growth of 21.8% which were primarily offset by higher tax expenses. During the quarter, effective tax rate was much higher at 28.4% (vs 1.7% for 4QFY20). We expect this to normalise to the 18- 20% range moving forward. At a PBT level, earnings were higher by 25.3% inline with its topline growth. As mentioned previously, improved utilisations rates of roughly 65% were driven by restocking activities by distributors on the back of recovery optimism having run low inventory levels last year.

YoY. 1QFY21 earnings more than tripled on a YoY basis primarily due to the strict lockdowns which were imposed in 1QFY20. This resulted in two weeks of lost business activity while still incurring fixed costs leading to a low base for comparison purposes.

Outlook. Management continues to see sustained recovery momentum for the rest of FY21. Nonetheless, order momentum may slow in 2QFY21 before picking up again in 2HFY21. We gather that external sales orders have sustained so far and despite stricter restrictions in parts of EU, manufacturing activity has by and large remained intact. Germany, which is one of HPMT’s key market, continues to register strong PMI numbers into April with hiring activity picking up. Broadly speaking, this should indicate sustained demand for HPMT’s products. However, closer to home Malaysian orders have slowed slightly amidst the surge in new cases but should recover once cases dwindle. Malaysia typically constitutes 15-20% in terms of geographical contribution.

Forecast. Maintain as Earnings Are Inline.

Upgrade to BUY; TP of RM0.62. We upgrade the stock to BUY with unchanged TP of RM0.62 post-recent share price weakness. Our TP is derived from pegging FY21 EPS to 15x P/E multiple. Stock offers a cyclical exposure to recovering manufacturing activities. HPMT currently trades at undemanding FY21/22/23 P/E multiple of 13.1/12.1/11.8x.

Source: Hong Leong Investment Bank Research - 27 May 2021