HPMT Holdings Bhd (“HPMT”), a cutting tool specialist is seeking to expand its production capacity setting the group on a better footing internationally. HPMT is currently trading below its IPO price and we believe it offers good buying opportunity. Recommend BUY with a target price of RM0.49 based on 11x PER FY20 as per closest related peers.

With almost a 40 year of track record, HPMT’s core business strength lies on manufacturing and distribution of high precision cutting tools, trading of related products and provision of coating services. The cutting tools are manufactured under HPMT brand and private labels with around 90% sales contributed by distributors from over 30 countries. Backed by its extensive product range and customisation capability, HPMT’s products are well recognised by global players with European clients contributed more than half of its revenue. Top 5 international customers accounted for 36% of total sales in FY18 with at least 8 years of business relationship with HPMT.

We remain positive on HPMT’s expansion plan which will see the group to boost its production capacity by 43.5% by FY21. Monthly production capacity will increase from current 148,000 pieces to 212,600 pieces, implying a 3-year compounded annual growth rate (CAGR) of 13%. HPMT’s standard and special cutting tools are used in a wide spectrum of industries such as automotive, aerospace, medical, semi-conductor and consumer electronics. Higher application of automation in manufacturing processes will certainly boost usage in machine tooling, we believe HMPT which has a solid and proven track record is set to benefit from the growing demand of cutting tools.

HPMT’s balance sheet remains healthy with 0.19x of net gearing ratio following their listing. A 30% dividend policy is expected to translate to dividend yield of 3.2% and 3.5% in FY19 and FY20 respectively. Currently trading at 32% below its IPO price, HPMT offers a solid value proposition supported by higher sales volume driven by capacity expansion moving forward.

Source: Rakuten Research - 5 Aug 2019