Results

• Homeritz’s 1HFY16 revenue of RM83.17m (+17% yoy) was translated into Adj PATAMI of RM16.97m (+72% yoy). This came in slightly above our expectation, which accounted for 55.6% of HLIB full year estimates.

Dividends

• None (2QFY15: none).

Highlights

• The company registered higher revenue and core earnings of RM83.17m and RM8.83m respectively, thanks to the strong US Dollar against MYR and higher sales volume which advanced by 2% yoy and 3% qoq.

• However, the company recorded weaker EBITDA and adj PATAMI by 9% and 8% qoq respectively, mainly due to the one off staff bonus cost incurred in the current quarter and lower average selling price.

• Utilization rate during the quarter was slightly higher at 82% (vs. 79% in 2QFY15) and we were guided that full year utilization rate for FY16 could be sustained at 80%.

• The company currently owns a vacant land of circa 84,507 sq ft. which is close to its 5 existing factories. Based on management’s gui dance, 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 additional 142 containers per year (circa 25% 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

• We update our forecast for FY16-17 based on latest guidance from management (mainly on lower projected average selling price). Hence, our forecasted EPS for FY16-17 is lowered by 11% and 21% respectively.

Rating

BUY

• Posi tives: 1) beneficiary of strong US$; (2) lower leather price which will boost its margin; (3) forecasted FY16 net cash per share of 20 sen; and (4) FY16 DY of 5.2%, based on 50% payout ratio.

Valuation

• We maintain our BUY recommendation with a lower target price of RM1.01 (previously RM1.28) based on unchanged P/E multiple of 11x of CY17 EPS.

Source: Hong Leong Investment Bank Research - 29 Apr 2016