HPMT’s orders have remained robust with rolling orders exhibiting accelerating momentum driven by pent up demand/restocking. In tandem with this, management is guiding for sequential improvement in utilisation rate in 3Q posing upside risk to our FY21 numbers. Encouraged by robust orders, HPMT plans to expand capacity by 5%, a stark contrast from the past. Maintain forecasts to err on the side of caution. Maintain BUY with unchanged TP of RM0.65 after pegging mid-FY22 EPS to 15x P/E multiple. HPMT currently trades at undemanding FY21/22/23 P/E multiple of 14.5/13.4/13.1x with a net cash position (8.8 sen/share) and offers an exposure to robust manufacturing activities.

We Met With Management Recently With the Following Key Takeaways:

Review of 1HFY21. 1HFY21 core earnings came in inline at 47% of FY21 forecasts. While revenue and operating margins were better (vs estimates), earnings were diluted by higher effective tax rate which we expect to gradually revert downwards towards end-FY21 (1HFY21: 26.8% vs 1HFY20: 15.4%) as HPMT’s new machine orders come in. Assuming high end of historical range of 20% effective rate, uplift on HPMT’s 1HFY21 earnings would have been higher by 9.5%. There was a contraction in gross margins in 2QFY21 (-2.0 ppts QoQ) due to additional staff expenses, likely to subside gradually with loosening restrictions on operating capacity. Geographically, 1HFY21 sales were propped up by all regions with Malaysia exhibiting the only decline. We anticipate gradual pick up in domestic contribution going forward.

Upswing intact. Orders have remained robust in FY21 with 12M cumulative rolling orders exhibiting accelerating momentum driven by pent up demand/restocking on the back of a strong rebound in manufacturing activities particularly for mould & die, medical and E&E industries. Based on feedback, management is optimistic of a continuation of the current trend. Despite 1 week of marginal activity in July (EMCO), the company is confident of a QoQ improvement in utilisation rate (2QFY21: 60%) as they would be ramping up to 100% operational capacity by Sept having achieved 80% vaccination rate (by end Aug). Nonetheless, there could be lingering challenges given a twice monthly testing requirement, in our view. Should management’s guidance materialise, we believe there’s upside to our forecasts as we are expecting a QoQ dip.

Resuming capex. Encouraged by robust order trends this year, HPMT has resumed various equipment orders and has brought forward its plans to invest in 2 units of CNC machines to 4QFY21 (7k pieces/month). This translates into c.5% increase on its annual production capacity. Given HPMT’s cautious approach to capex since listing, this is a stark contrast. In our view, the additional investments could also enable the company to keep its effective tax rate closer to the higher end of its historical range of 14-20% going forward.

Forecast. Maintain forecasts as we remain conservative considering ongoing SOPs.

Maintain BUY; TP of RM0.65. Maintain BUY with unchanged TP of RM0.65 after pegging mid-FY22 EPS 15x P/E multiple. We view the stock favourably as it offers an exposure to the still expansionary level of manufacturing activities. HPMT currently trades at undemanding FY21/22/23 P/E multiple of 14.5/13.4/13.1x with a net cash position (8.8 sen/share).

Source: Hong Leong Investment Bank Research - 17 Sept 2021