HPMT’s FY21 core PATAMI of RM13.8m (+66% YoY) was within expectations at 102% of forecasts. 4Q21 was weaker due to seasonal weakness. Overall, we believe FY21 orders have been driven by strong end market demand and front loading procurement in response to supply chain uncertainties. There are signs of improvement from aerospace market. We note potential spill-over impact of Russia-Ukraine crisis on tools demand. Maintain forecasts and BUY rating with unchanged TP of RM0.77 based on FY22 EPS tagged to 15x ex-cash P/E multiple.

Within expectations. HPMT reported 4QFY21 results with revenue of RM21.8m (- 10.6% QoQ, 20.2% YoY) and core PATAMI of RM3.2m (-23.1% QoQ, -8.8% YoY). This brings FY21 core PATAMI to RM13.8m, increasing by 66.1% YoY. Results met our expectations coming in at 102% of our full year forecasts.

Dividends. Special DPS of 0.35 sen going ex on 11 Mar-2022 was declared for the quarter (FY21: 1.75 sen; FY20: 1.38 sen).

QoQ. Core PATAMI declined by -23.1% driven by lower revenue (-10.6%) due to seasonal weakness which the company has guided for earlier. In tandem with the lower run rate, EBIT margins declined by 9.2ppts.

YoY. 4QFY21 core PATAMI declined by -8.8% despite achieving higher revenue, mainly due to lower margins at the GP level (-4.5ppts) which cascaded downwards.

YTD. FY21 core PATAMI came in higher by 66.1% driven by 26.0% increase in revenue due to upcycle in demand for cutting tools with manufacturing activities in expansionary zone. Overall, we believe HPMT has benefitted from restocking, pent up demand and front loading procurement in response to supply chain uncertainties throughout FY21.

Outlook. In 2022, management sees slightly more positive sentiment especially with impending border reopening. In general, order volumes have continued to increase. HPMT is working on increasing its offerings with more product lines in FY22. Based on our reading of the broader cutting tools market, there are signs of accelerating demand from the aerospace segment which could provide a longer runway for order outlook. Auto production cuts have also not dampened demand, we think due to inventory front-loading. We believe mould & die, medical and E&E demand remains resilient. However, while there is no direct exposure, we note the potential spill-over impact of the Russia-Ukraine crisis on manufacturing activities in the EU (~50% of sales).

Forecast. Maintained Pending Briefing Today.

Maintain BUY; TP of RM0.77. Maintain BUY with unchanged TP of RM0.77 after 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 FY22/23 P/E multiple of 13.5x/13.2x. Downside risks: slow-down in end markets, prolonged supply chain bottlenecks & EU lockdowns, increase in tungsten prices, geopolitical spill over.

Source: Hong Leong Investment Bank Research - 1 Mar 2022