Homeritz’ 2QFY22 core PATAMI of RM9.7m (30.9% QoQ; 64.3% YoY) which is the company’s highest ever quarterly core earnings, came in above expectations. The results beat was due to higher than expected sales volume as well as strengthening USD. We raise our earnings forecast by 8.9% and 9.1% for FY22-23 to account for stronger sales volume arising from the groups improved production planning and efficiency. We anticipate that Homeritz’ strong order outlook as well as the current favourable USD to MYR exchange rate to continue to positively contribute to earnings in the coming quarters. Maintain BUY with a higher TP of RM0.89 pegged to 11x FY22 core EPS of 8.1 sen.

Exceed expectations. 2Q22 core PATAMI of RM9.7m (QoQ: +30.9%; YoY: +64.3%) brought 1H22’s sum to RM17.1m (+30.7 YoY), accounting for 54.6% and 58.2% of our and consensus full year forecasts. The results beat was due to higher than expected sales volume and strengthening USD. This is the company’s highest quarterly revenue and core earnings. 2Q22 core PATAMI figure was arrived at after adjusting for foreign exchange gains of RM0.6m.

Dividend. None (1HFY22: none) (2Q21: 1 sen, 1HFY21: 1 sen).

QoQ. Revenue increased by 17.7% mainly due to higher sales volume as well as higher ASP while core PATAMI increased by 30.9% as raw material cost has stabilized, resulting in bottom line margin expansions.

YoY & YTD. Revenue increased by 17.5% YoY and 14.6% YTD due to higher sales volume as well as higher ASP compared to SPLY, while core PATAMI recorded a bigger magnitude of increase of 64.3% YoY and 30.7% YTD due to the same reason mentioned above.

Outlook. Homeritz achieved its highest quarterly revenue and core net profit on the back of stronger sales volume as a result of its improved capacity and efficiency as well as better margin due to higher ASPs with stabilized raw material costs. Nonetheless, we note that there are near term headwinds surrounding raw material costs and container shortages due to the Russia-Ukraine war and the recent lockdowns in China. Despite that, we anticipate Homeritz would be able to sustain its strong earnings moving forward due to (i) its healthy order outlook (production lead time: 75-90 days), (ii) its improved capacity output contributed by its new factory and improved production efficiency and; (iii) current favourable USD to MYR exchange rate of RM4.36/USD (>90% of Homeritz’ revenue is in USD). Also, given its healthy cash level of RM104m (NCPS of 24.6 sen), better earnings visibility and no capex anticipated, there is upside potential to dividend payout for FY22.

Forecast. We increase our earnings forecast by 8.9% and 9.1% for FY22-23 to account for stronger sales volume arising from the groups improved production planning and efficiency.

Maintain BUY with a higher TP of RM0.89 pegged to 11x of revised FY22 core EPS of 8.1 sen. We continue to like Homeritz for its position as an ODM manufacturer which allows it to withstand cost pressures and command better margins. Its new factory and improved production efficiency coupled with application for more foreign workers should boost production volume in the coming quarters, pending their approval. In addition, the company has a healthy balance sheet with net cash of RM104m or NCPS of 24.6 sen (47.1% of its market capitalization).

Source: Hong Leong Investment Bank Research - 29 Apr 2022