This article first appeared in The Edge Financial Daily on July 10, 2019
Homeritz Corp Bhd
(July 9, 67 sen)
Maintain buy with an unchanged target price (TP) of 71 sen: Homeritz Corp Bhd’s core earnings for the first nine months of its financial year 2019 (9MFY19) of RM15.8 million (+5% year-on-year [y-o-y]) came in within our expectations, accounting for 75.4% of our full-year forecast.
It declared a higher-than-expected first interim dividend of two sen (third quarter [3Q] of FY18 one sen) per share going ex on Aug 29, 2019. We raise our full-year dividend forecast to 3.5 sen per share, translating into a dividend yield of 5.6%.
Quarter-on-quarter, 3QFY19 revenue declined by 7% to RM37.6 million, however, core earnings improved by 5%. The increase in earnings was due mainly to lower raw material costs, mainly prices of leather, metal and foam. To recall, leather takes up about 35% of total costs.
Year-on-year, 3QFY19 revenue declined marginally by 5.7%, however, core earnings increased by 37% to RM5.9 million from RM4.3 million in 3QFY18. The significant improvement in core earnings was due to a stronger US dollar/ringgit (3QFY18 RM3.96/US dollar versus 3QFY19 RM4.13/US dollar) coupled with lower raw material costs mainly from leather and foam.
Year to date, 9MFY19 revenue declined by 9.7%, due to lower sales volume as a result of weaker market demand from Europe. Despite a weaker top line, core earnings came in stronger by 5%, thanks to the stronger US dollar/ringgit (9MFY18 RM4.04/US dollar versus 9HFY19 RM4.23/US dollar) that more than offset the lower sales volume.
The company’s main focus is the European market, and management mentioned that demand has slowed down and the competition in the region remains tough. Despite current minimal exposure to the US market, the company is seeing sales growth from the US market (thanks to the US-China trade war), but not yet a significant one.
The group is sitting on a large cash pile of RM73 million, with zero leverage. We see possible future vertical expansion (both up or down the production chain); over the years the group has gone down the production chain to produce smaller parts for its goods (that is steel and wooden legs for chairs and tables).
Forecast is unchanged. Maintain “buy” with an unchanged TP of 71 sen based on an unchanged 10 times price-earnings tagged to forward calendar year 2019 earnings. We continue to like Homeritz as the company is still on an expansion mode (looking for automation opportunity) coupled with its healthy balance sheet with a net cash per share of 24.2 sen (39% of market capitalisation). Last but not least, it also has a decent dividend yield of 5.6%. — Hong Leong Investment Bank Research, July 9