KUALA LUMPUR (Feb 5): Hong Leong Investment Bank (HLIB) Research has raised its target price (TP) for HPMT Holdings Bhd to 46 sen from 39 sen — while maintaining its "hold" rating — after adjusting its earnings forecast upwards by 7.6% on expectations of stronger orders and a better margin for the financial year ending Dec 31, 2021 (FY21).

In a note today, its analyst Jeremy Goh and the research team said HPMT's management told them that in FY20, declines were seen in most key geographical areas.

However, contributions from Italy and Germany, which were severely affected by Covid-19, were offset by those from Malaysia and Japan.

In Malaysia, machine tools sales to the mould and die industry picked up, while general precision component-making supported the market in Japan.

"Management is more optimistic about FY21’s prospects with key customers overall sounding a more positive tone despite the lockdowns. HPMT aims to sustain a utilisation rate of 65% to 75% in 1Q21 (the first quarter of 2021), an improvement over an average of 50%-60% achieved in 2020. Rates are expected to gradually improve through the year.

"Generally, demand recovery is to be driven by the mould and die, precision component, electronic as well as automotive segments. Nevertheless, exposure to end markets is rather diversified, and management believes potential chip constraints on automotive manufacturing as such would be mitigated," said the analysts.

However, they noted that product average selling prices are not expected to change as sales are mostly from existing product lines, with no drastic pricing adjustments foreseeable.

The second movement control order (MCO 2.0) has had slight impact on HPMT as its operations are classified as essential, according to the analysts.

"HPMT employs 17 foreign workers, which are placed in accommodations in adherence to housing requirements. The company has been encouraging customers to make orders in advance for delivery in case of a strict lockdown," they said.

Meanwhile, cases of Covid-19 are slowly declining in its key European markets, said the team.

"This, we anticipate, should be supportive of orders recovering with further potential flare-ups mitigated by effective roll-outs of vaccination programmes in respective countries," they noted.

The analysts pegged core earnings per share (EPS) of 3.8 sen estimated for FY21 at 12 times price-earnings (P/E) multiples, up from 11 times prior, due to stronger appetite for recovery stocks.

According to the research house, the stock offers cyclical exposure to an eventual economic recovery, but it is likely already priced as it is trading at FY21-22 P/E multiples of 13.4 times and 12.9 times respectively.

As at 10.49am today, HPMT shares were unchanged at 50.5 sen, giving it a market capitalisation of RM165.89 million.