Highlights

• A global player… Homeritz is one of the leading upholstered home furniture manufacturers in Malaysia. It designs, manufactures and exports three major products (upholstered sofas, dining chairs and bed frames) to more than 50 countries across all continents.

• Beneficiary of stronger USD… Sensitivity analysis shows that every MYR0.10/USD appreciation will boost FY15 net profit by about 6%.

• Broadening Homeritz’s revenue base… According to CSIL (Centre for Industrial Studies) research report, global consumption of upholstered furniture is expected to grow in 2015. With increasing consumer demand in global market, we believe that the Group will target more revenue contribution from the global market by marketing their products in international furniture fairs and furniture-buyers’ magazines. Despite recent slowdown in global economy, the Group still recorded consistent rise in revenue and earnings since FYE12. Thus, the Group is able to compete internationally despite intense competition from China.

• Stronger and sustainable margin… Homeritz’s margin would be boosted by improvement in utilization rate, stable leather prices, strong USD as well as reduction in labor cost dependency.

• Strong earnings and balance sheet… Homeritz’s revenue and PATAMI are expected to grow at CAGR of 8% and 14% respectively from FY14 to FY16. The Group has net cash per share of 23 sen and attractive dividend yield of 4.3% with 40% dividend policy.

Catalysts

• Stronger USD would have a positive impact on Homeritz’s profit margin.

• Favourable global consumption of upholstered furniture would broaden Homeritz’s earnings base.

• Margin expansion is expected to boost the Group’s earnings growth.

• Net cash position and attractive dividend yield.

Risks

• USD weakness.
• High raw material prices.
• High labour costs.
• Unexpected economic downturn.
• Production or operational risks.

Valuation

• We use 10x P/E which is premium to the furniture industry average P/E of 8x as we forecast the Group’s CAGR growth at 14%. Hence, we derive to a fair value at RM1.54. Given increasing consumer demand in global market, stronger USD, margin expansion and solid earnings base, we initiate coverage on HOMERITZ with a BUY call with a 30% upside potential.

Source: Hong Leong Investment Bank Research - 16 Mar 2015