Homeritz announced that its subsidiary had initiated civil proceedings against Khazanah Realty in relation to the SPA of two pieces of land. The civil proceedings claim that (1) Khazanah Realty is not entitled to terminate the SPA; and (2) Khazanah is prohibited from selling the lands in the SPA. We do not expect any material financial, operational and reputational impact from this litigation. Maintain BUY with an unchanged TP of RM0.78 pegged to PE multiple of 11.5x based on FY22 core EPS of 6.8 sen.

NEWSBREAK

Homeritz announced on Bursa that its wholly-owned subsidiary, Embrace Industries Sdn Bhd (“Embrace Industries”) had initiated civil proceedings on 24 Sep 2021 against Khazanah Realty Sdn Bhd (“Khazanah Realty”) in relation to the sale and purchase of two pieces of lands, Lot No. 11722 and Lot No. 11723, both in Mukim Parit Bakar, District of Muar, State of Johor (“the lands”). The agreement to purchase the lands was entered into between the Embrace Industries and Khazanah Realty on 1 Feb 2021 (“the SPA”). The civil proceedings by Embrace Industries claim that (1) Khazanah Realty is not entitled to terminate the SPA; and (2) Khazanah is prohibited from selling the lands in the SPA.

HLIB’s VIEW

Circumstances leading to the civil proceedings. Embrace Industries entered in to a SPA to purchase the lands on 1 Feb 2021 for a purchase price of RM5.7m subject to the fulfilment of 3 conditions as follows within 3 months with extension of 2 months (i.e. by 30 June 2021): (a) to obtain approval to construct the public infrastructure, factory building, planning permission and the building plan; (b) to obtain certification from the licensed architect that the construction of the public infrastructure for Lot 11723 has been commenced; and (c) to obtain the consent of the state authority to transfer Lot 11722 from Khazanah Realty to Embrace Industries. However, Embrace Industries was unable to fulfil the conditions (a) & (b) by the deadline due to Khazanah Realty refusal and failure to assist Embrace Industries in the applications by delaying and refusing to execute and sign the necessary documents. The reason Embrace Industries filed for the civil proceedings is mainly to prohibit Khazanah from terminating the SPA (on the basis that the conditions were not met by the deadline) and selling the lands to other buyers.

No material impact to Homeritz. Homeritz does not expect any financial impact from the civil proceedings other than the legal cost incurred. The proceedings also should not have any impact on its ongoing business operations. We also do not think that this will adversely impact the reputation for Homeritz as this is a proceeding initiated by Homeritz’ subsidiary with the intention to secure the lands. We will continue to monitor development of this matter.

Forecast. Unchanged.

Maintain BUY, TP: RM0.78 based on PE multiple of 11.5x of FY22 core EPS of 6.8 sen. We are positive on the outlook of the company supported by (i) its current strong order book (production lead time c.180 days); (ii) its position as an ODM manufacturer (which allows it to withstand cost pressure and command better margin); (iii) improved capacity contributed by its new factory as well as its better production efficienc y; and (iv) sustainable strong furniture demand.

Source: Hong Leong Investment Bank Research - 27 Sept 2021