Highlights

• Despite FY15 revenue being in-line, PATAMI was below our expectation as Homeritz imported its major raw material (Leather) at higher cost mainly due to strong USD vs. MYR. We recently contacted Homeritz to attain more information post 4QFY15 results. All in all, we left with a better understanding of the company and cut its earnings forecasts by circa 10%. However, we remain positi ve on the company’s earnings prospects:

• Net beneficiary of stronger USD against MYR. Based on our economist’s projection, MYR would remai n weak against US D. Hence, Homeritz’s FY16-17 earnings prospect remains bright as our MYR forecast is revised to RM3.80/US$ from RM3.60/US$. Moreover, sensitivity analysis shows that every RM0.10/US$ appreciation will boost FY16 net profit by circa 6%.

• Posi tive impact of the acquisi tion. Homeritz had on 1 June 2015 acqui red the remaining 35% of Embrace Industries Sdn Bhd. (“E ISB”). This will allow Homeritz to consolidate all revenue and profit of EISB, which in turn, contributes full impact of the acquisition in the company’s FY16 earnings.

• Expansion plan. Homeritz currently owns a vacant land of ci rca 84,507 sq ft. which is close to its 5 existing factories. Based on management’s guidance, this new factory could boost the company’s total production capacity by 19% or 570 containers per year vs. current production capacity of 3,000 containers per year. However, we only impute 285 containers per year (50% of 570 containers) into FY17 earnings forecast.

Risks

• USD weakness against RM; high raw material prices; high labour costs; unexpected economic downturn; and production or operational risks.

Forecasts

• Cut FY16 earnings forecasts by circa 10% due to higher raw materials and higher labour costs. However, we still expect FY16-17 EPS to grow at 2- year CAGR of 20%.

Rating

• Positives: 1) the company would benefit from strong US$; (2) its revenue and PATAMI are expected to grow at CAGR of 11% and 20% respectively from FY15 to FY17; (3) forecasted FY16 net cash per share of 22.3 sen; and (4) still attractive FY16E DY of 4. 2%, based on 40% payout ratio.

Valuation

• Post earnings revision, we maintain our BUY recommendation with lower target price of RM1.32. Our valuation is pegged to unchanged P/E multiple of 11x of CY16 EPS.

Source: Hong Leong Investment Bank Research - 3 Nov 2015