Results

• Homeritz’s 1QFY16 revenue of RM40.67m (+21.9% yoy) was translated into core net profit of RM8.83m (+169.1% yoy). This was in line with our expectation, which accounted for 25.9% of HLIB full year estimates.

Dividends

• None (1QFY15: none).

Highlights

• The company achieved a record high revenue of RM40.67m, thanks to the strengthening US Dollar against MYR. The company also registered record high core net profit of RM8.83m, as a result of stronger US Dollar as well as zero minority interest due to the acquisition of the remaining 35% of Embrace Industries Sdn Bhd on 1 June 2015.

• EBITDA margin for 1QFY16 improved to 30.12% from 20.45% in previous year, thanks to more efficient production lines and stronger USD.

• Management guided that its major raw material price (leather) is expected to decline for FY16 due to the protracted economic slowdown in China which will cap the consumption of leather for automotive industries. To note, average leather price for 1QFY16 was down by circa -3.3% yoy.

• Utilization rate during the quarter remain slightly high at 77% (vs. 76% in 1QFY15) and we were guided that full year utilization rate for FY16 could sustain at 80%.

Risks

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

Forecasts

• We update our earnings forecast for FY16-17 based on latest guidance from management (mainly on lower utilization rate of 80% vs 85% previously). To note, we roll forward our valuation to CY17.

Rating

• Maintain BUY, TP: RM1.28
• Posi tives: 1) the company would benefit from strong US$; (2) lower leather price which will boost its margin; (3) forecasted FY16 net cash per share of 20.6 sen; and (4) FY16 DY of 4.8%, based on 50% payout ratio.

Valuation

• We maintain our BUY recommendation with lower target price of RM1.28 (vs RM1.32 previously) based on unchanged P/E multiple of 11x of CY17 EPS.

Source: Hong Leong Investment Bank Research - 29 Jan 2016