Homeritz’s 9MFY19 core earnings of RM15.8m (+5.0% YoY) came in within our expectation, accounting for 75.4% of our full year forecast. Earnings improvement was due to lower raw material cost couple d with stronger USD against MYR. Declared higher-than-expected DPS of 2 sen. Reiterate BUY with a unchanged TP of RM0.71 given (i) strong balance sheet (net cash per share of 24.2sen), (ii) is still on an expansion mode and (iii) decent dividend yield of 5.6%.

Within expectations. 9MFY19 core earnings of RM15.8m (+5.0% YoY) came in within our expectation, accounting for 75.4% of our full year forecast.

Dividend. Declared higher-than-expected 1st interim dividend of 2 sen (3QFY18: 1.0 sen) per share going ex on 29th August 2019. We raise our full year dividend forecast to 3.5sen per share, translating to a dividend yield of 5.6%.

QoQ. 3QFY19 revenue declined by 7% to RM37.6m, however core earnings improved by 5.0%. The increase in earnings was due mainly to lower raw material cost, mainly prices of leather, metal and foam. To recall, leather takes up ~35% of total cost.

YoY. 3QFY19 revenue declined marginally by 5.7%, however, core earnings increased by 37% to RM5.9m from RM4.3m in 3QFY18. The significant improvement in core earnings was due to stronger USD/MYR (3QFY18: MYR3.96/USD vs 3QFY19: MYR4.13/USD) coupled with lower raw material cost mainly from leather and foam.

YTD: 9MFY19 revenue declined by 9.7%, due to lower sales volume as a result of weaker market demand from Europe. Despite weaker top line, core earnings came in stronger by 5.0%, thanks to the stronger USD/MYR (9MFY18: RM4.04/USD vs 9HFY19: RM 4.23/USD) that more than offset the lower sales volume.

European market remains challenging. The company’s main focus is the European market and management mentioned that demand has 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.

Debt free with large pile of cash. The group is sitting on a large cash pile of RM73m, with zero leverage. We see possible future vertical expansion (both up or down the production chain); over the years the group has went down the production chain, to produce smaller parts for its goods (i.e. steel and wooden legs for chairs and tables).

Forecast. Unchanged

Maintain BUY with unchanged TP: RM0.71 based on an unchanged 10x P/E tagged to forward CY19 earnings. We continue to like Homeritz as the company is still on an expansion mode (looking for automation opportunity) coupled with its healthy balance sheet with net cash per share of 24.2 sen (39% of market cap). Last but not least, it also has a decent dividend yield of 5.6%.

Source: Hong Leong Investment Bank Research - 9 Jul 2019