Homeritz expected to benefit from new US orders on trade war

TheEdge Fri, Jan 25, 2019 10:27am - 5 years View Original


Homeritz Corp Bhd
(Jan 24, 63 sen)
Maintain buy with a lower target price (TP) of 82 sen:
Homeritz Corp Bhd’s first quarter of financial year 2019 (1QFY19) core earnings of RM5.1 million (-18% quarter-on-quarter [q-o-q], -21.9% year-on-year [y-o-y]) came in within our expectations, accounting for 21% of our full-year forecast. We deem the results in line as we are expecting stronger earnings in the second half of FY19 (2HFY19).

 
Q-o-q, 1QFY19 revenue and core earnings declined by 10.1% and 18.0% respectively, due mainly to lower sales volume and weaker US$/RM (4QFY18: RM4.16/US$ versus 1QFY19: RM4.06/US$).

Y-o-y, 1QFY19 revenue and core earnings dropped by 21.5% and 21.9% respectively, due mainly to lower sales volume and weaker US$/RM (1QFY18: RM4.20/US$ versus 1QFY19: RM4.06/US$).

We opine that demand for leather from China will decline due to the US-China trade war and may result in falling leather prices. We cross-checked with Homeritz, and it too acknowledged that leather prices have softened a little. Besides leather, we foresee prices of foam, spray and packaging material (all by-products of oil) to soften slightly in the coming quarters due to lower crude oil price.

The company’s main focus is the European market and contribution from the US has always been minimal. However, the company is seeing sales growth from the US market, but not yet a significant one.

We remain positive on Homeritz’s outlook, as we opine that the company will benefit from new orders from US resulting from the US-China trade war, as US firms are looking for cheaper alternatives to avoid the tariff and stronger US dollar against the ringgit. Besides, the company is also in an expansion mode by purchasing new machinery to further enhance automation.

FY19-FY20 earnings are lowered by 2% due to a minor model up keeping adjustment. We also take this opportunity to introduce FY21 earnings.

We maintain our “buy” call with a slightly lower TP of 82 sen based on an unchanged 10 times price-earnings ratio tagged to calendar year 2019 earnings. We maintain our “buy” rating on Homeritz given its expansion mode (looking for automation opportunity) and we see potential growth in the Malaysia furniture market arising from US-China trade war. — Hong Leong Investment Bank Research, Jan 24

 

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