Highlights

• We reiterate our positive view on Homeritz following our recent meeting with management.
• A beneficiary of weak MYR… The recent weakening of MYR (against the US$) bodes well for Homeritz, as 99% of the revenue is denominated in US$, while only 40% of total production cost is denominated in US$. Our sensitivity analysis indicates that every 10 sen depreciation in MYR against the US$ will boost Homeritz’ FY17-18 bottomline by 6-7%.
• Benefiting from lower leather cost… The price of leather (accounting for ~45% of total production cost) has fallen by 20% since 4Q16, and management shared that current low leather cost will sustain in the near future, which is in turn favourable to Homeritz’ bottomline.
• Homeritz is gradually recovering from shortage of skilled foreign labour (which has been deterring the company from expanding its capacity despite brisk demand), as it has been approved to bring in an additional of 60 foreign workers since Oct-16.
• Still on expansion mode… The 5th production line (which will expand Homeritz’ capacity by another 15%) is on track to commence operation by 2Q17 (which part of the new factory will be rented out to its sub-contractors). Management shared that it is still on expansion mode (and it has recently acquired an additional 4 acres of landbank in Muar). Given its aggressive expansion plan, we expect pricing competition of Homeritz to heighten within the furniture players.

Risks

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

Forecasts

• We raise our FY17-19 core net profit forecasts by 6-7%, largely to account for lower leather cost, and the change in our MYR/US$ assumptions (RM4.20/US$ vs. RM4.00/US$ earlier).

Rating

BUY (↔), TP: RM1.11 ↑ ↑

• 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 MYR weakness against US$.

Valuation

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

Source: Hong Leong Investment Bank Research - 20 Dec 2016