Homeritz’s 1HFY18 core earnings of RM10.7m (-28% YoY) were below our expectations, accounting for only 36% of our full year forecast. 2QFY18 performance was affected by higher-than-expected raw material cost and stronger MYR vs USD. We cut our FY18-20 earnings assumptions by 25% as we tweak our MYR/USD assumption from RM4.1/USD to RM4.0/USD and adjust for higher raw material cost. We maintain HOLD with a lower TP of RM0.78 based on an unchanged 10x PE tagged to a rolled forward CY19 EPS of 7.8sen.

Below Expectations. 1HFY18 core earnings of RM10.7m (-27.8% YoY) came in below our expectation, accounting for only 36.3% of our full year forecast. The disappointment mainly stemmed from higher than expected material cost as elaborated below.

QoQ. 2QFY18 revenue fell 12% due to lower sales volume (number of containers sold declined by 4%) coupled with weaker USD (2QFY18: RM3.98/USD vs 1QFY18: RM4.2/USD). Core earnings plunged by 44.6% due to higher labour cost (employee bonus and more number of foreign labours) and higher raw material cost.

YoY. 2QFY18 revenue fell by 5.4% due mainly to the 10.6% strengthening of ringgit against USD (2QFY18: RM3.98/USD vs 2QFY17: RM4.45/USD). Earnings dropped by 49.8% due to weaker USD and higher raw material cost (in particular, foam and wood).

YTD. Despite the 5.5% increase in numbers of container sold, 1HFY18 revenue remained rather flat (+2.1% YoY) due to the weaker USD. Margins were under pressure (-10ppts YoY) due higher raw material cost (foam and wood).

Forecast. We cut our FY18-20 earnings by 25% respectively as we tweak our MYR/USD assumptions from RM4.1/USD to RM4.0/USD and adjust for higher raw material cost.

Maintain HOLD, TP: RM0.78 (previously RM1.00). Following the earnings cut, our TP is reduced from RM1.00 to RM0.78 which is still based on an unchanged 10x P/E tagged to a rolled forward CY19 earnings. Despite the results shortfall, we maintain our HOLD rating on Homeritz mainly because the company is still on an expansion mode (looking for automation opportunity) and there is a stable growth in the global furniture market arising from the growing real estate industry and increasing number of global retail stores.

Source: Hong Leong Investment Bank Research - 27 Apr 2018