Homeritz’ 3Q22 core PATAMI of RM8.6m (QoQ: -11.3%, YoY: +17.8%) brought 9MFY22’s sum to RM25.7m (YoY: +26%). Its performance came in within ours but exceeded consensus expectations at 75.4% and 79.8% respectively. Despite industry headwinds such as slowing US housing demand and declining consumer spending, we believe that (i) the group’s diverse customer base; (ii) its better pricing power; and (iii) favourable USD to MYR exchange rate will sustain the group’s earnings in subsequent quarters. Maintain BUY but with a lower TP of RM0.69 pegged to 9x FY23 core EPS of 7.7 sen.

In line. Homeritz’ 3Q22 core PATAMI of RM8.6m (QoQ: -11.3%, YoY: +17.8%) brought 9M21’s sum to RM25.7m (YoY: +26%). We deem the results within ours but exceeding consensus expectations at 75.4% and 79.8% respectively. 3Q22 core PATAMI figure was arrived at after adjusting for foreign exchange gains of RM2.6m.

Dividend. 1 sen, ex-date: 29 Aug 2022 (3Q21: none). 9M22: 1 sen (9M21: 1 sen).

QoQ. Revenue decreased by 6.1% mainly due to lower sales volume compared to a higher base in the previous quarter as the group was scaling up production to clear back log orders from production halt previously. Consequently, core PATAMI decreased by 11.3% in line with the decline in revenue.

YoY. Revenue increased by 36.5% due to an increase in sales volume and the stronger USD compared to SPLY. The increase in sales volume was mainly due to a lower base last year as there was a 14 days production halt SPLY and reduced production capacity due to MCO3.0 restrictions. Core PATAMI increased by a smaller margin of 17.8% due to higher tax expense.

YTD. Revenue increased by 21.2% due to the same reasons as in the YoY paragraph above. In turn, core PATAMI increased by 26%.

Outlook. Homeritz recorded another commendable quarter mainly benefitting from the strengthening USD. We are cognizant that the demand from the US has weakened recently due to reduced consumer spending as well as lower housing sales following rising inflation and recessionary fears. Nonetheless, we believe that Homeritz is relatively well positioned to manage the risk due to (i) the group’s diverse customer base (the group will be able to divert orders to other countries) (ii) stronger pricing power of Homeritz relative to peers as an ODM manufacturer; and (iii) current USD strength as >90% of the group’s revenue is in USD while costs are mainly in MYR. In addition, the group had also recently obtained approval for its application to bring in additional foreign labour. The foreign labour intake would be in time for the group’s expansion plan as the group will commence its expansion in the Muar furniture park by end-CY22 once the lands are handover to them by the authority.

Forecast. Unchanged.

Maintain BUY but with a lower TP of RM0.69 from RM0.81 as we rollover the valuation year to FY23 from FY22, pegged to a lower PE multiple of 9x based on FY23 core EPS of 7.7 sen. We continue to like Homeritz for its position as an ODM manufacturer which allows it to withstand cost pressures and command better margins. With the approval of the group’s application to bring in additional foreign workers, production capacity should increase in the coming quarters. Moreover, Homeritz has a healthy balance sheet with net cash of RM123.8m or NCPS of 26.7 sen (54.5% of its market capitalization). The group’s current net cash position will also benefit from the current interest rate upcycle.

Source: Hong Leong Investment Bank Research - 29 Jul 2022