HPMT’s 9MFY22 core PATAMI of RM7.0m (-34% YoY) was below our expectations at 64% of forecasts. Shortfall was mainly driven by margin miss due to various costs pressure. There is room for further sequential weakness ahead. Going forward, demand outlook for cutting tools remains uncertain with key markets seeing contractionary PMI numbers. Hence, we remain cautious on HPMT’s near term business prospects. Taking this into account, we cut FY22-23 forecasts by -13.8% and -16.5% after adjusting margins assumptions and tapering sales expectations. Maintain HOLD with lower TP of RM0.43 post earnings adjustment based on pegging FY22 EPS to 15x P/E multiple .

Below expectations. HPMT reported 3QFY22 results with revenue of RM22.0m (-3.6% QoQ, -9.8% YoY) and core PATAMI of RM1.6m (-42.2% QoQ, -62.5% YoY). This brings 9MFY22 core PATAMI to RM7.0m, decreasing by -33.9% YoY. We deem the results below expectations at 64% of our full year forecasts. Results missed driven by lower than expected margin as revenue came in-line at 75% of our forecasts.

Dividends. No DPS declared for the quarter (9MFY22: 0.50 sen; 9MFY21: 1.40 sen).

QoQ. Core PATAMI declined by -42.2% mainly driven by a combination of lower revenue (-3.6% QoQ) as well as weaker EBIT margins (-3.3 ppts). We attribute the lower revenue to weakening demand for cutting tools in-line with slowing manufacturing activities in key markets while margins compressed on the back of higher cost pressure which were not fully passed on as well as negative forex impact.

YoY. 3QFY22 core PATAMI declined by -62.5% resulting from -9.8% drop in revenue as well as significant drop in EBIT margins (-13.8 ppts). Key reasons for the drastic drop is as elaborated above. Additionally, impact from negative operating leverage and increase in distribution costs (+30%) posed further drag to bottom-line.

YTD. 9MFY22 core PATAMI declined by -33.9% resulting from much weaker margins at the gross level, with 7.5 ppts shaved off (vs 9MFY21). Similarly, we identify inflationary pressure from materials & distribution costs, supply chain disruption and unfavourable forex as main causes as revenue held steady at -1.3% comparatively.

Outlook. Going forward, demand outlook for cutting tools remains uncertain with contractionary manufacturing activities globally. 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, distributors would prefer to adopt a cautious buying pattern. For the factors mentioned above, we remain near term cautious on HPMT’s immediate business prospects.

Forecast. Cut FY22-23 forecasts by -13.8% and -16.5%, no change to FY25 numbers.

Maintain HOLD; TP of RM0.43. Maintain HOLD with lower TP of RM0.43 (from RM0.50) 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 - 22 Nov 2022