Highlights

• We recently organised a plant visit to Homeritz’s 5 manufacturing factories in Muar, Johor and left feeling positive about its business model, manufacturing capabilities and prospects.
• On average, Homeritz exports 158 containers of furniture product/month or utilisation of 80-85%. However, the group has experienced peak production of more than 172 containers. Presently, Homeritz’s production is still running on 1 shift per day of 8 hours for 6 working days per week.
• Homeritz is currently running a total of 5 plants with total built-up area of 455,000 square feet. The 5 plants are located within close proximity, leading to quicker time-tomarket, more efficiency and greater economies of scale. Hence, the Group is able to have better control over production costs as well as quality of their products.
• Factory A and B commissioned operation in Jan 05 and Nov 06 respectively. Factory A’s main functions include administrative office, storage of raw materials, drawing & cutting sections as well as studio & showroom while plant B is running sewing section.
• Besides, factory D and E deals with woodworking section (dining chair frames and dining tables) and stainless steelworking section respectively.
• After the wooden base frames, leather and other upholstery materials are received, fully treated and inspected by the quality control personnel, they will be sent to factory C for assembly work.
• Homeritz owns a vacant land of about 84,507 square foot close to its 5 existing factories. Based on management’s guidance, RM3m is needed to set up a new factory. We expect this new landbank to be a re-rating catalyst for Homeritz in coming years.

Forecasts

• Unchanged.

Rating

BUY

Positives

• (1) the group could benefit from strong USD; (2) its revenue and PATAMI are expected to grow at CAGR of 8% and 14% respectively from FY14 to FYE16; (3) it has net cash per share of 23 sen; and (4) Still attractive FY15E DY of 3.8%, based on 40% payout ratio.

Negatives

• Depreciation of USD vs. MYR; high raw material prices; high labour costs; unexpected economic downturn; and production or operational risks.

Valuation

• Maintain BUY with unchanged TP of RM1.54 based on 10x P/E given increasing consumer demand in global market, stronger USD, margin expansion and solid earnings base.

Source: Hong Leong Investment Bank Research - 20 May 2015