Results

• Homeritz’s 4QFY16 revenue of RM33.9m was translated into PATAMI of RM4.6m. This brought FY16 Core PATAMI to RM27.6m, accounting for 88.5% of our full year estimate.

Deviations

• Lower than expected production volume and margin due to shortage of foreign labour.

Dividends

• A final single tier tax-exempt dividend of 3.0 sen was declared in 4Q.

Highlights

• Yoy: Homeritz’s FY16 revenue increased 8% yoy to RM157.6m mainly contributed by stronger US$ against MYR. Consequently, PATAMI improved by 19% yoy due to stronger US$ against MYR and lower leather cost despite a higher labour cost (circa 12% yoy) and a reduction in sales volume (-1% yoy).

• QoQ: 4QFY16 revenue experienced a double digit contraction, recording RM33.9m (-16.2% qoq) caused by a 14.9% decline in volume sold. This is mainly attributed by the shortage in foreign manpower which has also reduced EBITDA margin by 7%-pts qoq. Consequently, PATAMI weakened to RM4.6m (-29% qoq).

• Outlook: Homeritz requires skilled foreign workers to manufacture its products. However, the government’s decision to temporarily freeze the intake of foreign workers in Feb 2016 has caused a shortage in their manpower. The company has recently managed to secure the approval to hire and bring in foreign workers which will allow the company to recover its production output especially with new capacity expected to come in by next year. Thus, we expect sales volume to recover and EBITDA margin to normalize gradually in FY17.

Risks

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

Forecasts

• FY17-18 net profit forecasts are reduced by 3% and 1% respectively.

Rating

BUY (↔), TP: RM1.06 ↑

• Despite the unexpected blip in manpower which resulted in lower volume production, we expect the company to recover its output with the recent approval to bring in foreign labour. Homeritz also benefits from recent ringgit weakness against US$.

Valuation

• We maintain our BUY recommendation with a lower target price ofRM1.06 (previously RM1.09) after incorporating latest forecasts based on unchanged P/E multiple of 11x of CY17 EPS.

Source: Hong Leong Investment Bank Research - 28 Oct 2016