We expect sales orders of HPMT Holdings Bhd (HPMT) to pick up from 2H2021 onwards as global manufacturing activities are on gradual recovery. Meanwhile, easing of domestic movement control order and expediting vaccination program nationwide should benefit HPMT which serves a diversified range of industries within the cutting tools industry. Most notably, recent share price weakness offers buying opportunity as the stock is presently trading below its IPO price of RM0.56. BUY with target price of RM0.66 based on 15x FY22 PER as per 3- year average valuation of regional peers.

HPMT’s core business lies on manufacturing and distribution of high precision cutting tools with a proven track record of over 40 years. This core segment makes up ~90% of total sales complemented by trading of related products and provision of physical vapour deposition coating services. HPMT has a wide market reach serving more than 30 countries, including Europe (eg: Germany and Italy), Asia (eg: China, Japan) and others such as Australia, U.S., and Mexico. HPMT’s core focus is on Europe and Asia which are among the top cutting tools consumers worldwide. In FY20 both regions contributed 47% and 30.4% respectively followed by 20.4% from Malaysia. Cutting tools are widely used in manufacturing process and it requires high precision, through HPMT’s technical know-how, the group serves a diverse range of industries ranging from automotive, aerospace, die and mould, electrical and electronics, general engineering, just to name a few.

Due to the broad market range, HPMT is set to benefit from the global recovery of manufacturing activities, particularly from Europe’s automotive sector. The anticipated recovery is backed by encouraging economic data such as Purchasing Managers’ Index which pointed towards gradual expansion of manufacturing activities led by reopening of economy. On the domestic front, we expect factory utilisation rate to improve due to easing of domestic movement control order and expediting vaccination program nationwide. Adding to the diversified industries and clients HPMT serves, sales orders are expected to pick up from 2HFY21 onwards.

Financially, HPMT has a dividend policy of 30% payout ratio. Since listing in 2019, the group has an average payout ratio of 55%, translating to a projected yield of 3% in FY21 and FY22. Balance sheet is healthy supported by net cash position of RM23.6m. Valuation-wise, HPMT is trading at a FY22 PE of 11.2x which we deemed buying opportunity has emerged following the share price weakness and is trading below its IPO price.

Source: Rakuten Research - 11 Aug 2021