HPMT’s 1QFY22 core PATAMI of RM2.7m (-17% YoY and QoQ) fell below our expectations at 19% of forecasts. Shortfall was due mainly to operating margin miss which we attribute to unfavourable forex and possibly higher raw material costs. With the Russia-Ukraine war dragging much longer than anticipated, we reckon there would be further impact on supply chain disruptions, possible energy interruption and weaker end markets. Likewise, China’s strict Covid-19 policy has also led to contractionary manufacturing PMI reading in April-22. Hence, we grow cautious on HPMT’s near term business prospects. Cut FY22- 23 earnings by -14.6% and -0.4%. Downgrade to HOLD with lower TP of RM0.55.

Below expectations. HPMT reported 1QFY22 results with revenue of RM23.0m (5.6% QoQ, 4.2% YoY) and core PATAMI of RM2.7m (-17.3% QoQ, -17.3% YoY). We deem the results below expectations at 19% of our full year forecasts.

Deviations. Shortfall can be attributed mainly to operating margin miss (-3.5ppts) as revenue came in in-line at 23%.

Dividends. No DPS was declared (1QFY21: 0.40 sen).

QoQ. Core PATAMI declined by -17.3% as a result of lower GP margin (-0.4%) as well as higher taxes during the quarter. We believe the lower margins can be partly attributed to unfavourable movements in EUR/MYR during the quarter.

YoY. 4QFY21 core PATAMI declined by -17.3% despite achieving higher revenue (+4.2%), attributed to much lower GP margins (-6.1%) as a result of what we deem to be much higher materials & distribution costs, supply chain disruption and unfavourable forex.

Outlook. HPMT derives ~51% of its sales from Europe, of which, 76% comes from Italy, Germany and Czech Republic (negligible to Russia/Ukraine). PMI reading from the region continues to slow down in April with Italy (lowest since Dec-20) and Germany (20 month low) recording much weaker prints. With the Russia-Ukraine war dragging much longer than anticipated, we think there would be further impact on supply chain disruptions, possible energy interruption and weaker end markets. Likewise, China’s strict Covid-19 policy has also led to contractionary manufacturing PMI reading in April-22. Hence, we grow cautious on HPMT’s near term business prospects.

Forecast. Cut FY22-23 forecasts by -14.6% and -0.4%. Introduce FY24 earnings forecasts of RM15.4m.

Downgrade to HOLD; TP of RM0.55. Downgrade to HOLD with lower TP of RM0.55 post-earnings adjustment based on pegging FY22 EPS to 15x P/E multiple. As a result of longer than expected geopolitical tensions, manufacturing activities in HPMT’s key markets are starting to slow/contract. Downside risks: slow-down in end markets, prolonged supply chain bottlenecks, increase in tungsten prices, geopolitical spill over.

Source: Hong Leong Investment Bank Research - 30 May 2022