Homeritz Corp Bhd
(Jan 6, 67.5 sen)
Upgrade to buy with a higher target price (TP) of 76 sen: Homeritz Corp Bhd’s first quarter of financial year 2020 (1QFY20) core profit after tax and minority interests (Patami) of RM7.8 million (quarter-on-quarter: +54.2%); year-on-year: +82.3%) was above our expectations, accounting for 35.9% of our full-year earnings.

The better-than-expected earnings were due to higher-than-expected sales volumes. We raise our FY20/21 forecasts by 5.5%/2.5% respectively to account for better sales volumes. After our earnings adjustment, we upgrade our rating to “buy” (from “hold”), with a higher TP of 76 sen (from 74 sen previously), based on 10 times revised current year 2020 earnings per share of 7.6 sen. We continue to like Homeritz due to its healthy net cash per share of 28.9 sen and increased automation efforts.

Its core Patami grew 54.2% in tandem with a revenue growth of 23.2%, and better profitability was driven by better sales volumes, lower production costs and a weaker ringgit.

Moreover, core Patami rose sharply by 82.3% to RM7.8 million from RM4.3 million for 1QFY19. This was attributed to better sales volumes, the weaker ringgit and cheaper raw material costs during the period.

The positive volume growth in 1QFY20 is encouraging for the group. Noting their revenue streams remain geographically diversified as Homeritz supplies close to 40 different countries, the group shared it is benefitting from increased sales to the US, which it will continue to try to grow via trade fairs. Homeritz has room for increased order volumes, as it is operating at just 70% capacity currently. Despite this, we expect the coming quarters to be slightly weaker due to higher minimum wages in major cities (including Muar, Johor where Homeritz’s manufacturing facility is located).

As at end-November, Homeritz had net cash and net cash per share of RM86.7 million (or 28.9 sen). We believe the group will continue to utilise the cash pile for future vertical expansion (both up or down the production chain). Over the years the group has gone up the production chain to produce smaller parts for its goods (steel and wooden legs for chairs and tables).

We upgrade our call to “buy” (from “hold” previously) following the recent share price retracement and our earnings upgrade. — Hong Leong Investment Bank Research, Jan 6