Homeritz’s 1QFY19 core earnings of RM5.1m (-18.0% QoQ, -21.9% YoY) came in within our expectation, accounting for 21% of our full year forecast. We deem results in line as we are expecting stronger earnings in 2HFY19. 1QFY19 weaker earnings were due to lower sales volume and weaker USD/MYR. Lower FY19-20 earnings by 2% on minor model up keeping post annual report release which consequently lowers TP slightly to RM0.82 (from RM0.84). Key positives include (i) lower material cost, (ii) is still on an expansion mode (looking for automation opportunity) and (iii) potential growth for Malaysian furniture players arising from the US-China trade war.

Deemed In-line. 1QFY19 core earnings of RM5.1m (-18.0% QoQ, -21.9% YoY) came within our expectation, accounting for 21% of our full year forecast. We deem the results in line as we are expecting stronger earnings in 2HFY19.

QoQ. 1QFY19 revenue and core earnings declined by 10.1% and 18.0% respectively, due mainly to lower sales volume and weaker USD/MYR (4QFY18: MYR4.16/USD vs 1QFY19: MYR4.06/USD).

YoY. 1QFY19 revenue and core earnings dropped by 21.5% and 21.9% respectively, due mainly to lower sales volume and weaker USD/MYR (1QFY18: MYR4.20/USD vs 1QFY19: MYR4.06/USD).

Lower material cost moving forward. We opine that demand for leather from China would decline due to the US-China trade war and may result in falling leather prices. We crosschecked with Homeritz, and they too acknowledged that leather prices have softened a little. Besides leather, we foresee prices of foam, spray and packaging material (all by-products of oil) to soften slightly in the coming quarters due to lower crude oil price.

Increasing orders from US but still at an early stage. The company’s main focus is the European market and contribution from US has always been minimal. However, the company is seeing sales growth from the US market, but not yet a significant one.

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

Forecast. FY19-20 earnings are lowered by 2% due to a minor model up keeping adjustment. We also take this opportunity to introduce FY21 earnings.

Maintain BUY with slightly lower TP: RM0.82 based on an unchanged 10x P/E tagged to CY19 earnings. We maintain our BUY rating on Homeritz given its expansion mode (looking for automation opportunity) and we see potential growth in the Malaysia furniture market arising from the US-China trade war.

Source: Hong Leong Investment Bank Research - 24 Jan 2019