HPMT’s 9MFY21 core PATAMI of RM10.6m (+122% YoY) was within expectations at 78% of forecasts. Operations have normalised at 100% since Sep-21. Orders have remained robust so far but 4Q21 could be marginally weaker due to seasonality. Overall, we believe orders have been driven by strong end market demand and front loading procurement in response to supply chain uncertainties. All in, indications are the current cycle should remain sustainable with further upside if aerospace and auto production recovers. Maintain forecasts and BUY rating with higher TP of RM0.77 after rolling forward earnings to FY22 EPS tagged to 15x ex-cash P/E multiple.

Within expectations. HPMT reported 3QFY21 results with revenue of RM24.4m (9.5% QoQ, 31.3% YoY) and core PATAMI of RM4.2m (34.7% QoQ, 91.7% YoY). This brings 9MFY21 core PATAMI to RM10.6m, increasing by 121.9% YoY. Results met our expectations coming in at 78% of our full year forecasts.

Dividends. Third interim DPS of 0.5 sen going ex on 3 Dec-2021 was declared for the quarter (9MFY21: 1.4 sen; 9MFY20: 0.88 sen).

QoQ. Core PATAMI expanded by 34.7% driven by higher revenue (+9.5%) due to increased orders from dealers. EBIT grew 37.7%, boosted by higher margins (+5.1ppts) as positive operating leverage kicked in from higher utilisation. Additionally, HPMT has been successful in passing on higher raw materials costs in the form of higher ASPs.

YoY. 3QFY21 core PATAMI surged by 91.7% mainly resulting from low base in 3QFY20 which saw restrictions on operating capacity and weaker orders from conservative dealers with global economy ravaged by the pandemic.

YTD. 9MFY21 core PATAMI came in higher by 2.2x partly due to low base last year brought about by restrictions and cloudy economic outlook. Also aiding in the stronger performance is robust demand for HPMT’s cutting tools from expansionary manufacturing activities in 2021.

Outlook. Management expects a slightly weaker finish to 2021 due to seasonal weakness. Order trends have remained robust which may have given rise to some recognition lag, in our view (i.e. orders coming in faster than billings). End markets like mould & die, medical and E&E have stayed resilient through to Nov-21. Based on our reading of the broader cutting tools market, there are nascent signs of recovery from the aerospace segment (low double digit YoY) which could provide a longer runway for order outlook. Auto production cuts have also not dampened demand, we think due to higher built-in inventory buffers. Overall, we believe HPMT has benefitted from restocking, pent up demand and front loading procurement in response to supply chain uncertainties. However, we do note that this could reverse if bottlenecks persist or if end markets demand weakens. All in, indications are the current cycle should remain sustainable.

Forecast. Maintain as Earnings Are Inline.

Maintain BUY; TP of RM0.77. Maintain BUY with higher TP of RM0.77 (from RM0.65) after rolling forward earnings to FY22. Our TP is derived from pegging FY22 EPS to 15x ex-cash P/E multiple plus HPMT’s net cash per share of 10 sen. Stock offers a cyclical exposure to still expansionary manufacturing activities. HPMT currently trades at undemanding FY21/22/23 P/E multiple of 13.0/12.0/11.9x. Downside risks: slow-down in end markets, prolonged supply chain bottlenecks & EU lockdowns, increase in tungsten prices and higher tax rate.

Source: Hong Leong Investment Bank Research - 23 Nov 2021