Homeritz’ 1QFY23 core PATAMI of RM6.0m (QoQ: -36.8%; YoY: -18.9%) came in below expectations, making up 19.7% and 21.1% of our and consensus full year forecasts. We cut our FY23/24 earnings by -14.8%/-14.2% to account for lower sales volume and introduce FY25 forecast. Homeritz’ earnings are expected to remain muted in view of the lack of demand catalysts as central bankers around the world continue to raise interest rates, causing housing demand to be hit. As home sales continue to decline, furniture demand would inevitably follow suit. For these reasons, we downgrade to SELL with a lower TP of RM0.45 pegged to 8x FY23 core EPS of 5.7 sen.

Below expectations. Homeritz’ 1QFY23 core PATAMI of RM6.0m (QoQ: -36.8%; YoY: -18.9%) made up 19.7% and 21.1% of our and consensus full year forecasts. The results was below expectations due to lower sales volume. 1QFY23 core PATAMI figure was arrived at after excluding foreign exchange gain amounting to RM321k.

Dividend. None. (1QFY22: None).

QoQ. Revenue decreased by 23.9% due to declining product sales as furniture demand declined for the quarter. Consequently, core PATAMI declined by 36.8%.

YoY. Revenue decreased by 33.5% due to declining sales volume but was partially offset by the stronger USD. Core PATAMI declined by a smaller magnitude of 18.9% as the stronger USD for the period provided better margin.

Outlook. Homeritz’ earnings are expected to remain muted going forward as it faces headwinds on several fronts, including: (i) declining home sales in its key markets in the North America and EU regions due to rising mortgage rates, which negatively impacts demand for furniture; (ii) weakening USD trend (Dec 2022 average: RM4.41/USD vs. Nov 2022 average: RM4.61/USD), which could compress the group’s margin; (iii) elevated inflation which impacts consumer spending; (iv) increasing risk of recession in the US and EU regions; and (v) normalizing home office furniture demand as consumers gradually shift from work from home back to the office. Having said that, we believe the group’s strong balance sheet with a net cash position should help it to weather through these challenges ahead.

Forecast. We cut our FY23/24 earnings by -14.8%/-14.2% to reflect lower sales volume assumption. We introduce FY25 forecast.

Downgrade to SELL (from Hold) with a lower TP of RM0.45 (from RM0.53) pegged to 8x FY23 core EPS of 5.7 sen. As the furniture industry continues to see headwinds as highlighted above, we expect Homeritz’ prospects for the near to mid-term will continue to be challenging. Nonetheless, the group’s NCPS of 33.7 sen should provide some support to its share price.

Source: Hong Leong Investment Bank Research - 18 Jan 2023