Homeritz’s reported a 2QFY22 headline net profit growth of 63.6% YoY to RM10.3m, mainly due to improved margins on the back of better economies of scale. After adjusting for non-core items, Homeritz’s core net profit came in at RM9.7m. Cumulative 1HFY22 core net profit of RM17.1m was above our and consensus estimates, accounting for 62% and 58% of our full-year forecasts respectively. The discrepancy in our numbers was mainly due to the stronger-than expected sales. We are adjusting our FY22-24F earnings forecast upwards by 6- 10%, mainly to account for the stronger export sales. While demand growth might slow down in the near-term due to cost-push inflation, we think that the impact could be mitigated by the strengthening of USD. Additionally, we are of the view that Homeritz’s strong profit margins will be sustainable going forward, given its positioning as an Original Design Manufacturer (ODM). We reiterate our Outperform call on Homeritz, with a lower TP of RM0.80 (previously RM0.82) however, as we lower our PE multiple to 10x (close to its +1 SD of its 5-year historical PE, see figure 1) from 12x. We believe that the premium valuation ascribed is justified given its higher-than-average profit margins. Meanwhile, we also roll forward our valuation base year to CY23F EPS.

• Results review. Homeritz’s 2QFY22 revenue grew by 17.5% YoY to RM68.9m, on the back of the favourable foreign exchange rate and increase in sales volume. PBT surged by 79.3% YoY to RM13.8m, lifted by an expansion in profit margins due to better economies of scale. Homeritz’s PBT margin improved from 13.2% in 2QFY21 to 20.1%.

• Outlook. Although the global furniture demand growth might taper off in the near-term due to inflation, we think that the negative impact could be mitigated by the favourable foreign exchange rate. Nevertheless, we gather that demand is still robust for Homeritz, with a production lead time of 75-90 days. Meanwhile, we think that Homeritz positioning as an ODM, will enable the group to pass on the soaring raw material prices by adjusting its selling price by introducing new designs. The group is also applying to increase its foreign workers headcount, which should provide an additional boost to its production capacity, thereby leading to an improvement in profit margins given the better economies of scale.

Source: PublicInvest Research - 29 Apr 2022