Homeritz expected to use cash pile for vertical expansion

TheEdge Thu, Oct 31, 2019 10:30am - 4 years View Original


Homeritz Corp Bhd
(Oct 30, 66.5 sen)
Downgrade to hold with a higher target price (TP) of 74 sen:
Homeritz Corp Bhd’s fourth quarter of financial year 2019 (4QFY19) core price after tax and minority interest (Patmi) of RM5 million (quarter-on-quarter [q-o-q]: -14.8%; year-on-year [y-o-y]: -20.9%) brought FY19 core Patmi to RM20.8 million (y-o-y : -2.7%). This was within our expectations, accounting for 99.3% of our full-year earnings. One-off adjustments included foreign exchange gains or losses.

It proposed a final dividend per share (DPS) of one sen (4QFY18: 1.5 sen), bringing its full-year DPS to three sen (FY18: 2.5 sen).

The decline in 4QFY19 core Patmi was in tandem with lower revenue which fell 10.4%, due to lower volume sold as the number of containers shipped out fell 15% q-o-q. Additionally, lower volume resulted in lower economies of scale.

Y-o-y, core Patmi fell 20.9% while revenue declined 16.2% due to similar reasons, as the number of containers shipped out decreased by 21%.

For FY19, revenue declined 11.3% (13% lower shipped volumes, mainly to European countries). However, core Patmi declined only 2.7% to RM20.8 million, mainly due to a stronger US dollar and lower cost of certain raw materials.

While lower volume remains a concern for Homeritz, we note its revenue stream remains geographically diversified as the company supplies to close to 40 countries. Furthermore, the management shared that the group is benefitting from higher sales to the US, which it will continue to grow via trade fairs. Homeritz has room for higher order volume as it is currently operating at only 70% capacity.

As at end-August, Homeritz had net cash of RM81.7 million and net cash per share of 27.2 sen. We believe the group will continue to utilise the cash pile for future vertical expansion, both up and down the production chain. Over the years, the group has gone up the production chain, producing smaller parts for its goods, such as steel and wooden legs for chairs and tables.

As earnings were in line, we keep our forecasts unchanged.

After rolling over our valuation year from calendar year 2019 (CY19) to CY20, we raised our TP to 74 sen from 71 sen previously, based on 10 times CY20 earnings per share of 7.4 sen. While we continue to like Homeritz due to its healthy net cash per share and increased automation efforts, we believe further upside will be capped by its stretched valuations following its recent share price outperformance (note that its share price has risen by 15.4% since September 2019). — Hong Leong Investment Bank Research, Oct 30

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