Homeritz’s FY18 core earnings of RM21.4m (-27.3% YoY) came in above our expectation, accounting for 111% of our full year forecast. The upward surprise was mainly due to favourable sales mix. 4QFY18 weaker earnings YoY were due to higher raw material cost, higher labour cost, and stronger MYR vs USD. The QoQ improvement was due to better product mix. We raise our FY19-20 earnings assumptions by 11% as we adjust for higher USD/MYR assumption. We upgrade to BUY with a higher TP of RM0.84 based on an unchanged 10x PE tagged to a forward CY19 EPS.

Above expectation. FY18 core earnings of RM21.4m (-27.3% YoY) came in above our expectation, accounting for 111% of our full year forecast. The upward surprise was mainly due to higher-than-expected sales volume and better-than-expected margins.

Dividend. Proposed final interim DPS of 1.5 sen (vs. 4QFY17: 2.2sen) and bringing YTD DPS to 2.5 sen, translating to dividend yield of 3.7%.

QoQ. 4QFY18 revenue increased slightly by 0.8%, but core earnings surged by 47%, boosted by (1) better product mix, (2) slightly stronger USD/MYR (3QFY18: MYR3.93/USD vs 4QFY18 MYR3.98/USD) and (3) lower operating cost arising from reduced overtime and outsourcing work.

YoY. 4QFY18 revenue increased by 4.7% due mainly to higher sales volume. Earnings dropped by 10.6% due to higher labour cost (result of foreign labour levy), and higher raw material cost (in particular, foam, spray, and packaging).

YTD. FY18 revenue remained rather flat at -1.5%, as improved sales volume was dragged by weaker USD/MYR, (FY17: MYR4.30/USD vs FY18: MYR3.98/USD). Margins were further pressured (-4.6 pts YoY) by higher raw material (foam spray, and packaging) and higher labour cost.

Better FY19 outlook. We turn positive on Homeritz’s outlook, as we opine that the company will benefit from (1) new orders from US, (result of the US-China trade war, as US firms are looking for cheaper alternatives to avoid the tariff) and (2) stronger USD against MYR. Besides, the company is also on expansion mode (purchasing new machineries to further enhance automation).

Forecast. We raise our FY19-20 earnings by 11% as we raise our USD/MYR assumption from MYR4.0/USD to MYR4.1/USD.

Upgrade to BUY from HOLD, TP: RM0.84 (previously RM0.76) based on an unchanged 10x P/E tagged to a forward CY19 earnings. After incorporating our earnings adjustment, we upgrade our call from a HOLD to a BUY with a higher target price of RM0.84.

Source: Hong Leong Investment Bank Research - 31 Oct 2018