Homeritz’s 1HFY19 core earnings of RM9.9m (-7.7% YoY) came in below our expectation, accounting for 41% of our full year forecast. The setback was due to lower than expected sales volume. Despite results shortfall we maintain BUY rating with a lower TP of RM0.71 mainly because the company (1) strong balance sheet (net cash per share of 23.9sen), (2) is still on an expansion mode (looking for automation opportunity) and (3) decent dividend yield of 4.8%.

Below expectations. 1HFY19 core earnings of RM9.9m (-7.7% YoY) came in below our expectation, accounting for 41% of our full year forecast. The disappointment was due mainly to lower-than-expected sales volume.

QoQ. 2QFY19 revenue and core earnings increased by 11.9% and 32.3% respectively, the increase was due mainly to higher sales volume and stronger USD/MYR (1QFY19: MYR4.06/USD vs 2QFY19: MYR4.15/USD).

YoY. 2QFY19 revenue declined marginally by 0.2%, however, core earnings increased by 47.3% to RM5.6m from RM3.8m in 1QFY18. The significant improvement in core earnings was due to stronger USD/MYR (2QFY18: MYR3.98/USD vs 2QFY19: MYR4.15/USD) couple with lower raw material cost mainly from leather and foam.

YTD: 1HFY19 revenue and core earnings declined by 11.7% and 7.7% respectively. The stronger USD/MYR (1HFY18: RM4.01/USD vs 1HFY19: RM 4.11/USD) was more than offset by lower sales volume.

European market remains challenging. The company’s main focus is the European market and management mentioned that the demand had slowed down and competition in the region remains tough. Despite current minimal exposure to the US market, the company is seeing sales growth from the US market (thanks to the US China trade war), but not yet a significant one.

Forecast. FY19/20/21 earnings are lowered by 14/13/12% respectively to adjust for lower sales volume.

Maintain BUY with lower TP: RM0.71 (previously: RM0.82) based on an unchanged 10x P/E tagged to a forward CY19 earnings. Despite the results shortfall, we maintain our BUY rating on Homeritz mainly because the company is still on an expansion mode (looking for automation opportunity). We also continue to like the company for its healthy balance sheet as they currently have net cash per share of 23.9sen (38% of total market cap). Last but not least, it also has a decent dividend yield of 4.8%.

Source: Hong Leong Investment Bank Research - 7 May 2019