Homeritz’s reported a 3QFY22 headline net profit growth of 32.7% YoY to RM11.2m, driven by the improved economies of scale and stronger USD. After adjusting for forex gain of RM2.7m, Homeritz’s core net profit came in at RM RM8.6m. Cumulative 9MFY22 core net profit of RM25.7m was above our and consensus forecast, accounting for 85% and 80% of full-year estimates respectively. The discrepancy in our numbers was mainly due to the higher-than expected sales and the impact of stronger USD. We raise our FY22F forecast by 7.2%, to account for the higher sales volume given the strong backlog orders. However, we cut our earnings forecast for FY23-24F by an average of 17%, as we are anticipating demand to weaken due to inflationary pressure. Following our earnings adjustment, our TP is lowered to RM0.53, based on CY23 EPS pegged to 9x PE multiple (close to its 5-year average). Given the limited upside potential, we downgrade our call to Neutral.

• Results review. Homeritz’s 3QFY22 grew by 36.6% YoY to RM64.7m, mainly attributable to the increase in sales volume and the strengthening of USD. Homeritz saw its PBT margin improved by 1.6% to 24.3%, on the back of greater economies of scale given the higher sales volume, coupled with the favourable forex rate.

• Dividend. Homeritz declared a first interim dividend of 1sen, translating to a dividend yield of 2.0%. Although we are projecting earnings to decline in FY23F, we expect Homeritz to maintain an attractive DPS of 2.0sen, which translates into a payout ratio of 35%. This will be supported by its healthy free cash flow of RM25m.

• Outlook. We think that there is a possibility for Homeritz to fill the void from China with customers looking to diversify given China’s strict lockdown measures to curb Covid-19. Additionally, we gather that Homeritz has managed to obtain approvals to increase its foreign workers headcount, which could potentially lead to better production efficiency. However, we are of the view that the strong furniture demand boosted by the work-from-home arrangements would taper off, dragged by inflationary pressure and rising interest rates that should affect property sales. We understand Homeritz’s production lead time has scaled back to pre-Covid levels of c.2 months.

Source: PublicInvest Research - 29 Jul 2022