Homeritz’s 9MFY18 core earnings of RM15m (-33.9% YoY) came in above our expectation, accounting for 83% of our full year forecast. The upward surprise was mainly due to lower operating cost arising from previous automation measures. 3QFY18 weaker earnings YoY were due to higher raw material cost, higher labour cost, and stronger MYR vs USD. We raise our FY18-20 earnings assumptions by 7-13% as we adjust for lower operating cost. We maintain HOLD with a higher TP of RM0.76 based on an unchanged 10x PE tagged to a forward CY19 EPS of 7.8sen.

Above expectations. 9MFY18 core earnings of RM15.0m (-33.9% YoY) came in above our expectation, accounting for 83.5% of our full year forecast. The upward surprise was mainly due to lower-than-expected operating cost arising from the recent automation measures.

Dividend. Declared first tier interim dividend of 1 sen/share (unchanged YoY). For full-year, we are projecting a total DPS of 3 sen, translating to dividend yield of 4.3%.

QoQ. 3QFY18 revenue fell 1.5% due to lower sales volume (number of containers sold declined by 5%) however, core earnings (+27.5%) was boosted by lower operating cost arising from reduced overtime and outsourcing work.

YoY. 3QFY18 revenue fell by 10.7% due mainly to the 11% strengthening of ringgit against USD (3QFY18: RM4.04/USD vs 3QFY17: RM4.48/USD). Earnings dropped by 40.9% due to weaker USD, higher labour cost, and higher raw material cost (in particular, foam, spray, and packaging).

YTD. 9MFY18 revenue remained rather flat (-2.3% YoY). However, margins were under pressure (-8.7ppts YoY) due to higher raw material (foam spray, and packaging) and higher labour cost.

New machineries. Homeritz recently invested in several new machines, which we believe moving forward, would improve efficiency rate and result in cost savings (fewer number of workers needed).

Forecast. We raise our FY18-20 earnings by 7-13% respectively as we adjust for lower operating cost.

Maintain HOLD, TP: RM0.76 (previously RM0.67). Following the earnings raise, our TP is increased from RM0.67 to RM0.76 which is still based on an unchanged 10x P/E tagged to a forward CY19 earnings.

Source: Hong Leong Investment Bank Research - 27 Jul 2018