HPMT’s FY22 core PATAMI of RM8.2m (-41% YoY) was below our expectations at 88% of forecasts. Shortfall was mainly driven by margin miss due to various costs pressure. We expect continued weakness ahead. Going forward, demand outlook for cutting tools remains uncertain with key markets seeing sluggish manufacturing activities. Hence, we remain cautious on HPMT’s near term business prospects. Taking this into account, we cut FY23-24 forecasts by - 18.2% and -10.6% after adjusting margins assumptions and tapering sales expectations. Maintain HOLD with slightly higher TP of RM0.45 post rolling forward our valuation base to FY23. TP is derived based on pegging FY23 EPS to 15x P/E multiple.

Below expectations. HPMT reported 4QFY22 results with revenue of RM20.9m (-5.1% QoQ, -4.2% YoY) and core PATAMI of RM1.2m (-25.3% QoQ, -63.5% YoY). This brings FY22 core PATAMI to RM8.2m, decreasing by -40.8% YoY. We deem the results below expectations at 88% of our full year forecasts. Results missed driven by steeper than expected margin contraction as revenue came in-line at 99.6% of our full year forecasts.

Dividends. DPS of 0.35 going ex. on 9-Mar-23 was declared for the quarter (FY22: 0.85 sen; FY21: 1.75 sen).

QoQ. Core PATAMI declined by -25.3% mainly driven by a steep contraction in margins compounded by lower sales (-5.1%) during the quarter. At the EBIT level, on QoQ basis, margins contracted further by 4.4%. The quarter saw decreased orders from dealers. We attribute this to elevated uncertainties over potential EU power shortages during the winter period. On the margin front, we believe elevated raw material prices and inability to pass on costs due to an uncertain demand environment further crimped margins. Adding to this, HPMT incurred renovations costs in 4QFY22.

YoY. 4QFY22 core PATAMI declined by -63.5% resulting from -4.2% drop in revenue coupled with significant drop in EBIT margins (-9.0 ppts). Key reason for the drastic drop in addition to higher raw materials is negative forex impact.

YTD. Core PATAMI declined by -40.8% amidst a relatively flattish revenue performance (-2.0%). GP margins contracted by -8.1% due to aforementioned costs reasons as well as forex impact.

Outlook. Going forward, demand outlook for cutting tools remains uncertain with weak manufacturing conditions in key markets. China’s reopening could lend a hand in driving cutting tools demand but the effect has yet to be felt in the demand pulse. Additionally we gather, competition in China is very stiff translating to thin margins. Going forward, we expect further sequential weakness considering the prevailing soft conditions. All in all, we remain near term cautious on HPMT’s immediate business prospects.

Forecast. Cut FY23-24 forecasts by -18.2% and -10.6%.

Maintain HOLD; TP of RM0.45. Maintain HOLD with higher TP of RM0.45 (from RM0.43) post-earnings adjustment. Despite the earnings cut, our TP rises as we rollover our valuation base to FY23. TP is derived by pegging FY23 EPS to 15x P/E multiple. As a result of various macro uncertainties, manufacturing activities in HPMT’s key markets are still sluggish. 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 - 27 Feb 2023