4QFY20 core PATAMI of RM7.7m (QoQ: 374.1%, YoY: 140.9%) brought the FY20 sum to RM22.3m (+17.5%). This was above ours and consensus full year forecasts, making up 111.5% and 110.4% of full-year FY20 forecasts. We increase our FY21/22 forecasts by 8.0%/2.5% to account for stronger sales volumes, particularly to the US going forward. After adjusting for changes in forecasts, rolling over our valuation year to FY22 and higher PE multiple (of 11.5x from 10.0x), our TP rises from RM0.72 to RM0.98. Maintain BUY.

Above expectations. 4QFY20 core PATAMI of RM7.7m (QoQ: 374.1%, YoY: 140.9%) brought the full year FY20 sum to RM22.3m (+17.5%, after adjusted for RM1.3m foreign exchange gains). The results beat expectations, making up 111.5% and 110.4% of our and consensus estimates. The positive results surprise was due to better-than-expected sales volumes.

Dividend. 4QFY20: 1.5 sen DPS proposed. (FY20: 1.5 sen) (4QFY19: 1 sen, FY19: 3 sen). Note that 1.5 sen DPS proposed is expected to be paid out to an enlarged share base. To recap, Homeritz proposed a bonus issue of 1 bonus share and 1 free warrant (Warrants C) for every 4 existing shares at a date yet to be decided. However, note that Homeritz already has an outstanding warrant (Warrants B) with an exercise price of 54 sen per share. Depending on the amount of Warrant B exercised before the ex-bonus issue date and Warrant C exercised after the bonus issue date but before the dividend ex-date, the enlarged share base would be between 375.0m and 562.5m (Figure #2). Based on 1.5 sen DPS, this amounts to between RM5.6m and RM8.4m in total dividend, which would be 23.8% and 35.8% of FY20 full year earnings.

QoQ. Sharp jump in revenue (+90.3%) and core PATAMI (+374.1%) was due to resumption of full production operations from the onset of RM CO, which took effect on 10 June 2020. Note that Homeritz had faced production disruptions in 3QFY20 due to MCO restrictions on operations.

YoY. Revenue rose 37.8% due to higher volumes sold. Core PATAMI (+140.9%) rose even more than revenue growth due to lower cost of production per unit due to higher volumes and well as stronger USD against MYR.

YTD. Higher sales (+5.2%) and core PATAMI (+17.5%) were due to similar reasons mentioned in YoY paragraph.

Outlook. With the on-going US-China trade war (and therefore continuing tariffs on China made furniture exported to the US), we continue to see orders diverting away from China to SEA (Figure #3). We expect Homeritz continue to benefit from this trend, as we note that sales to the US has increased from 4.5% of sales in FY19 sales to 13.0% in FY20.

Forecast. We increase our FY21/22 forecasts by 8.0%/2.5% to account for stronger sales volumes, particularly to the US going forward.

Maintain BUY, TP: RM0.98. With favourable sales outlook due to ongoing WFH arrangements in key markets and trade diversion away from China to SEA, we raise our PE multiple from 10x to 11.5x (+1.5SD above 5-year average). After adjusting for changes in forecasts, rolling over our valuation year to FY22 and higher PE multiple, our TP rises from RM0.72 to RM0.98. Note that currently, Homeritz has a cash pile of RM77.5m (or 26 sen/share) as of end-Aug. Maintain BUY

Source: Hong Leong Investment Bank Research - 30 Oct 2020