Results

• In line. Homeritz’s 1Q17 core PATAMI of RM8.5m (QoQ: 85%; YoY: -4.6%) accounted for 27% of our full year estimates. We consider the results within our expectation as 1Q is seasonally stronger (in terms of output, due to the absence of maintenance shutdown).

Deviations

• None.

Dividends

• None.

Highlights

• QoQ… Homeritz registered a higher revenue of RM41.9m (up by 23.6%) while core PATAMI improved by 85% (from RM4.6m to RM8.5m) mainly due to strong US$ against MYR (average ringgit exchange rate weakened to RM4.21/US$ from RM4.04/US$) and higher sales volume (as Homeritz gradually recovered from shortage of skilled foreign labour since early-Oct).
• YoY… Although the company recorded a 3% increase in revenue to RM41.9m, yoy core PATAMI weakened to RM8.5m (-4.6%) due mainly to weaker USD against MYR (to RM4.21/US$ from RM4.29/US$).
• We remain positive on Homeritz, due to: i) its expansion plan (i.e. the 6th production line, which will expand Homeritz’s capacity by 15%); ii) the gradual recovery from shortage of skilled foreign labour since Oct-16; and iii) its US$ exposure (as 99% of the total revenue is denominated in US$, while only 40% of total production cost is paid in US$).
• Minimal impact from Employer Mandatory Commitment (ECM). Latest mandate requiring employers to pay labour levy starting 2018 will have minimal impact on Homeritz as the company has been absorbing the levies since a few years back.

Risks

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

Forecasts

• We maintain our FY17-19 core PATAMI forecasts.

Rating

Maintain BUY, TP: RM1.15↑

• We continue to remain positive on Homeritz mainly because the company is still on expansion mode, and we believe that stronger US$ trend will provide a favourable environment for Homeritz to mitigate rising cost of doing business.

Valuation

• We maintain our BUY recommendation with an unchanged target price of RM1.15 based on unchanged 11x of CY17 EPS.

Source: Hong Leong Investment Bank Research - 26 Jan 2017