Homeritz Corp Bhd
(June 2, RM1.42)
Maintain buy with higher target price of RM1.82: Homeritz  on June 1 acquired the remaining 35% of Embrace Industries Sdn Bhd (EISB) for RM12.17 million cash. This will make EISB a wholly-owned subsidiary.

The principal activity of EISB is to design, manufacture and sell metal frames for dining chairs as well as metal-based upholstered furniture and furniture parts.

The acquisition will allow Homeritz to consolidate all revenue and profit of EISB which in turn will contribute positively to the earnings of the group as a whole in future.

We are positive on the acquisition as the purchase consideration translates into price of three times price-earnings ratio (PER) vis-à-vis the group’s pre-acquisition PER of 11 times. 

It would result in a 17% increase in profit after tax and 21% compound annual growth rate (CAGR)  in the group’s profit after tax and minority interest (Patami) from financial year 2014 (FY14) to FY16.

The group’s FY15 net cash will be reduced to RM52 million from RM65 million. 

Homeritz’s balance sheet remained healthy as post-acquisition cash is equivalent to 18.6% of market price.

FY15/FY16 forecasts are raised by 3% to 18.5% to reflect positive impact of the acquisition. FY15 upward adjustment is minimal given that it will only impact earnings by two months.

Positive factors include the group benefiting from a strong US dollar; its revenue and Patami are expected to grow at CAGR of 8% and 21% respectively from FY14 to FY16; forecast FY15 net cash per share of 25.5 sen and still attractive FY15 dividend yield of 3.7%, based on 40% payout ratio.

Post earnings upgrade, we raise our TP based on unchanged 10 times calendar year 2016 (CY16) PER.

Homeritz has proposed a bonus issue (one for two) and free warrants (one for four). The bonus shares will not be entitled to the free warrants. 

The proposals announced are expected to be completed by the third quarter of 2015. Post-bonus issue, our TP would be adjusted from RM1.82 to RM1.21 while share price will be adjusted from RM1.37 to RM0.91. — HLIB Research, June 2

This article first appeared in The Edge Financial Daily, on June 3, 2015.