1QFY21 core PATAMI of RM7.2m (QoQ: -7.0%, YoY: -7.3%) made up 33.1% and 31.1% of ours and consensus estimates. We consider the results within expectations, as we expect performance to weaken in subsequent quarters amidst rising raw material cost and weaker USD. We adjusted our forecast to reflect a stronger demand, while moderated by a weaker USD and higher raw material cost. Due to the offsetting effects of these adjustments, our earnings are only adjusted slightly by 4.1%/0.3% for FY21/FY22. Our TP decreases from RM0.78 to RM0.72 pegged to an unchanged PE multiple of 11.5x of FY22 earnings. Despite having anticipated Homeritz’s earnings performance to weaken in subsequent quarters, we expect share price to be cushioned by the company’s generous dividend payout backed by its cash pile that accounts for >33% of its market capitalisation. Maintain BUY.

Within expectations. 1QFY21 core PATAMI of RM7.2m (QoQ: -7.0%, YoY: -7.3%) made up 33.1% and 31.1% of ours and consensus estimates. We consider the results within expectations, as we expect performance to weaken in subsequent quarters amidst rising raw material cost (particularly, leather and foam) and weaker USD.

Dividend. 1QFY21: None Declared (1QFY20: None).

QoQ. Revenue increased by 13.3% but core PATAMI decreased by 7.0%. The growth in revenue was due to the increase in the volume sold, while the decrease in core PATAMI was due to the progressively rising cost of raw materials in 1QFY21 compared to 4QFY20.

YoY. Revenue increased by 26.7% nonetheless, core PATAMI decreased by 13.0%. The growth in revenue was due to the increase in volume sold, while the decrease in core PATAMI was attributed to the progressively rising cost of raw materials and labour cost in 1QFY21 compared with 1QFY20.

Operating in a challenging environment. Despite the rise in demand from the US due to trade diversion, WFH culture, rising US new home sales (which is in turn tied to higher demand for furniture), alongside Homeritz’s position as an ODM manufacturer which has a competitive advantage over its peers in terms of product pricing, we are cognisant that the operating environment is turning increasingly challenging, given the rising cost structure (particularly, rising prices of raw materials, such as foam and leather and freight cost) and the weakening of USD. Besides, there is heightened risk of workplace Covid-19 outbreaks as seen in other manufacturing factories. As Homeritz is operating near its full capacity, any production disruption could potentially cause a delay in the delivery of goods and will put more pressure on its output.

Forecast. We adjusted our forecast to reflect a stronger demand, while moderated by a weaker USD and higher raw material cost. Due to the offsetting effects of these adjustments, our earnings are only adjusted slightly by 4.1%/0.3% for FY21/FY22.

Maintain BUY, TP of RM0.72. Our TP decreases from RM0.78 to RM0.72 pegged to an unchanged PE multiple of 11.5x of FY22 earnings. Despite having anticipated Homeritz’s earnings performance to weaken in subsequent quarters, we expect share price to be cushioned by the company’s dividend payout of 37% (back by its cash pile of RM90.6m (or 22 sen per share), accounting for >33% of its market capitalisation), which in turn translates to a decent dividend yield of 4.5%.

Source: Hong Leong Investment Bank Research - 2 Feb 2021