Results

• Homeritz’s 9MFY16 revenue of RM123.64m (+14% yoy) was translated into Adj PATAMI of RM23.28m (+47% yoy). This came in above our expectation, which accounted for 86% of HLIB full year estimate. Deviations

• We deem the earnings above our expectations. The deviation is mainly caused by stronger US$ vs our assumption of RM3.80/US$.

Dividends

• A first interim single tier tax-exempt of 2.0 sen was declared in 3Q.

Highlights

• 9MFY16 review… Homeritz registered a higher revenue of RM123.64m (up by 14% yoy) while PATAMI improved by 42% yoy (from RM12.9m to RM22.5m) mainly due to strong US$ against MYR and higher sales volume.

• 3QFY16 review… Although the company recorded a 9% yoy increase in revenue to RM40.5m, qoq basis revenue dropped by 5%. PATAMI weakened sequentially to RM6.2m (-20% qoq) due mainly to higher labour cost, slightly lower sales volume (-4% qoq) and weaker USD against MYR (- 6% qoq)

• Our house projected a weakening bias in MYR within the range of RM4.00-4.20. Our sensitivity analysis shows that every RM0.10/US$ depreciation in ringgit will boost net profit by circa 7%.

Risks

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

Forecasts

• FY16-17 net profit forecast is raised by 15.5% and 8.3% to RM31.2m and RM29.2m to reflect our latest MYR assumption of RM4.00/US$ and RM3.90/US$ respectively for FY16 & FY17 (vs. RM3.80 previously)

Rating

• Maintain BUY, TP: RM1.09

• Positives: 1) the company would benefit from strong US$; (2) lower leather price which will boost its margin; (3FY16 DY of 5.9%, based on 50% payout ratio.

Valuation

• We maintain our BUY recommendation with a higher target price of RM1.09 (previously RM1.01) after incorporating latest forecasts based on unchanged P/E multiple of 11x of CY17 EPS.

Source: Hong Leong Investment Bank Research - 29 Jul 2016