HPMT’s 1HFY22 core PATAMI of RM5.4m (-15% YoY) were within our expectations at 45% of forecasts. Nonetheless, we are anticipating a slower 2HFY22 judging by weaker manufacturing environment. Going forward, demand outlook for cutting tools remains uncertain with key markets, EU and China seeing contractionary PMI numbers. Hence, we remain cautious on HPMT’s near term business prospects. Despite the results coming inline, we cut FY22- 23 forecasts by -10.4% and -4.6% after recalibrating margins assumptions and cutting back on sales expectations. Maintain HOLD with lower TP of RM0.50 post-earnings adjustment based on pegging FY22 EPS to 15x P/E multiple .

Within expectations. HPMT reported 2QFY22 results with revenue of RM22.8m (-1.0% QoQ, +2.5% YoY) and core PATAMI of RM2.7m (+2.2% QoQ, -12.5% YoY). This brings 1HFY22 core PATAMI to RM5.4m, decreasing by -15.0% YoY. We deem the results within expectations at 45% of our full year forecasts. Nonetheless, we are anticipating a slower 2HFY22 judging by weak macro manufacturing numbers.

Dividends. First interim DPS of 0.50 sen was declared going ex. on 5-Sept-22 (1HFY22: 0.50 sen; 1HFY21: 0.90 sen).

QoQ. Core PATAMI increased by 2.2%, offsetting a mild decline in revenue (-1.0%) brought about by lower admin expenses (-3.1%) and lower effective tax rates (1QFY22: 21.1% vs 2QFY22: 12.0%). The lower tax rates were mainly due to higher tax allowances claimable resulting from recent purchase of machineries.

YoY. 2QFY22 core PATAMI declined by -12.5% despite achieving higher revenue (+2.5%) as gross margins fell by 4.6 ppts. Gross margins for 2QFY22 marks the weakest since 1Q20 where we believe higher materials & distribution costs, supply chain disruption and unfavourable forex were the key drag factors.

YTD. 1HFY22 core PATAMI declined by -15.0% resulting from much weaker margins at the gross level, with 5.3 ppts shaved off (vs 1HFY21). Similarly, we identify inflationary pressure from materials & distribution costs, supply chain disruption and unfavourable forex as main causes.

Outlook. Going forward, demand outlook for cutting tools remains uncertain with key markets, EU and China seeing contractionary PMI numbers. The growing possibility of energy supply interruption and subsequent rationing in EU may dampen demand in the near term. Aside from this, we believe should end markets continue to weaken, customers would prefer to run down on inventory buffers built up during the pandemic period. For the factors mentioned above, we remain near term cautious on HPMT’s near term business prospects.

Forecast. Despite the results coming inline, we cut FY22-23 forecasts by -10.4% and -4.6% after recalibrating margins assumptions and cutting back on sales expectations.

Maintain HOLD; TP of RM0.50. Maintain HOLD with lower TP of RM0.50 (from RM0.55) post-earnings adjustment based on pegging FY22 EPS to 15x P/E multiple. As a result of various macro uncertainties, manufacturing activities in HPMT’s key markets are slowing. Hence, we remain near term cautious on HPMT’s business prospects. Downside risks: slow-down in end markets, new geopolitical flare-ups and increase in tungsten prices.

Source: Hong Leong Investment Bank Research - 23 Aug 2022