Seeking listing on the Main Market, HPMT Holdings Bhd (“HPMT”) is a cutting tool specialist with strong international presence and proven track record. Recommend BUY with a target price of RM0.63 based on 13x PER FY20 as per closest related peers.

With almost 40 years of experience in the cutting tools industry, HPMT is primarily involved in the manufacturing and distribution of cutting tools, trading of 3rd party cutting tools, supporting equipment and accessories of metalworking as well as provision of physical vapor deposition coating services. HPMT’s extensive portfolio of products range and capability in customisation enable them to cater for customers’ need with short manufacturing and delivery lead time in various industry application. Backed by a distribution network of more than 30 countries, the group has a well-diversified geographical revenue contribution with Europe and Asia being the top sales contributors at 50.7% and 28.9% respectively in FY18.

Bulk of the IPO proceeds (80.3%) will be earmarked to purchase new machineries and equipment. The group aim to boost production capacity by 43.5% by FY21 from current 148,200 pieces per month to 212,600 pieces per month, implying a 3-year compounded annual growth rate of 13%. Meanwhile, 6.9% from the proceeds will be utilised for working capital purposes. The allocation is important for the group to increase its inventory level to ensure stock availability and shorter time delivery. The expansion is set to enhance HPMT’s competency to cope with the growing demand and eliminate limited capacity constraints as the group is currently running at an utilisation rate of over 80%.

HPMT has a dividend policy of 30%, translating to an expected dividend yield of 2.2% and 2.6% in FY19 and FY20 respectively. Post listing, net gearing is set to improve from 0.36x to 0.19x. Net profit is expected to grow at 11.4% and 17.6% respectively in FY19 and FY20 on the back of higher sales volume from HPMT’s production capacity expansion as well as rising products demand due to higher application of automation within the global manufacturers.

Source: Rakuten Research - 12 Jun 2019