HPMT’s FY21 was within expectations driven by restocking, pent up demand and front loading procurement. Orders in 2022 have remained steady sequentially with mould & die, medical and E&E end markets, resilient. Additional machine orders in 2Q22 would expand capacity by +10%. Since the rise in geopolitical conflict, HPMT has not seen discernible impact from the region. We reckon potential impact to tools demand could come from supply chain disruptions and energy interruption. Tweak FY22/23 forecasts by - 4%/+1%. Post-briefing we maintain BUY with a lower TP of RM0.65. Stock has tumbled by -28% since the conflict. While the situation is fluid, post-sell down HPMT currently trades at undemanding FY22/23 P/E multiple of 12.2x/11.3x.

We Attended HPMT’s Post-results Briefing With the Following Key Takeaways:

Review of FY21. FY21 core PATAMI came in within expectations, higher by 66.1% YoY 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. Weaker GP margin in 4Q21 was guided to be due to ERP migrations as well as exchange rate headwinds while higher raw mat costs have been passed through. Management continues to expect steady GP margins in 2022 with higher input costs to be passed through albeit with some lag.

Orders steady. Orders have all around remained steady so far in 2022 (vs 4QFY21). HPMT reckons that orders in FY22 will continue to grow at a faster pace relative to overall tools market given its low base. Orders from its primary end markets exposure mould & die, medical and E&E segments remain resilient. The company now operates at a utilisation rate of 60-70% on higher production capacity (+5%) having received two CNC machines by end of Dec-21. Along with management’s expectation of economic recovery in 2022, the company has placed orders for another 4 CNC machines amongst other equipment which would translate into an additional capacity of 10% (RM10m capex). The ensuing capital allowances could help keep a lid on tax rates in FY22-23.

Fluid situation. HPMT derives ~51% of its sales from Europe of which 76% comes from Italy, Germany and Czech Republic (negligible to Russia/Ukraine). PMI readings from the region stayed expansionary in Feb-22. Since the rise in geopolitical conflict, HPMT has not seen any discernible impact from the region thus far. Nonetheless, given the rapidly evolving situation we think the bulk of the impact to tools demand could come from supply chain disruptions, possible energy interruption near term and weaker end markets.

Forecast. Tweak FY22 earnings by -3.8% but increase FY23 by 1.4% after accounting for additional capacity and weaker forex.

Maintain BUY; TP of RM0.65. Post-briefing we maintain BUY with a lower TP of RM0.65 post-earnings adjustment and pegging FY22 EPS to 15.0x P/E multiple. As a result of geopolitical tensions, the stock has tumbled by -28% in Feb-22. Near term stock sentiment could remain dented by evolving events in Europe. While the situation is fluid, post-sell down HPMT currently trades at undemanding FY22/23 P/E multiple of 12.2x/11.3x.

Source: Hong Leong Investment Bank Research - 7 Mar 2022