By Khairie Hisyam
Upholstered furniture maker Homeritz Corp Bhd sees relatively little coverage from research houses but investors seem to have found plenty of positives, judging by a doubling of its share prices over the past year. Is it too late to join the party?
Business model: A manufacturer of upholstered home furnitures, Homeritz Corp was established in 1997 and subsequently listed on Bursa Malaysia in 2010.
The company is both an original design manufacturing (ODM) and an original equipment manufacturing (OEM) player. As an ODM, it designs and manufactures furniture for its customers and this segment is the main contributor to revenue. As an OEM it makes furniture based on designs provided by clients.
It has five factories in Muar, Johor, which on full production capacity allows it to export an average of 250,000 containers of products monthly, according to Hong Leong Investment Bank (HLIB).
Upholstered sofas in particular contribute the bulk of earnings, comprising 55% of revenue in the financial year 2014 (FY14), followed by upholstered dining chairs (30%) and upholstered bed frames (13%).
Today, the company exports its products to 50 countries worldwide – half its exports go to the Asia-Pacific region with another 46% to the Americas and European countries. According to HLIB, 99% of the company’s products are exported. In 2008, it created the “eritz” brand name for its products.
On July 8 the company, via a subsidiary, inked a sale and purchase agreement (SPA) for a 4.07ha freehold agricultural land adjacent to its five factories. The agreed price is RM7.46 million and will be entirely funded from internal funds.
According to a company official, the site will be used for a future expansion of production capacity.
Shareholders and management: The majority of shares in Homeritz are held by its co-founders Chua Fen Fatt and Tee Hwee Ing, who are also married to each other. Chua holds 34.42%, while Tee holds 29.42%, according to the 2014 annual report. There are no other substantial shareholders.
The couple also run the company, Chua being the managing director and Tee as an executive director. There are no other executive members of the board.
Under their watch, Homeritz posted RM127.2 million in revenue for FY14, up 12% year-on-year (yoy). That translated into RM20.2 million in net profit that year, 34% higher y-o-y.
In the current financial year ending Aug 31, the company has raked in RM71.2 million (+42% y-o-y) in total revenue by the end of the six-month mark, although net profit so far had only improved marginally by 4% to RM10.8 million.
The company is slated to announce third quarter of financial year 2015 earnings by end-July, said a company official that KINIBIZ had spoken to.
Share performance: If you had bought Homeritz shares one year ago, you’d be basking in more than 100% return – Bloomberg puts the counter’s one-year return at 106% as at the close of trading on July 28, 2015.
It is an ascent that began in early 2013. In April that year, the counter was still just above 20 sen per share, around which it hovered since late 2011, according to adjusted prices from Bloomberg. But it then began a general upward trend and breached the RM1.00 threshold for the first time on July 2, 2015. It closed at RM1.09 on July 28.
According to a company official, Homeritz does not have an official dividend policy. However, its prospectus noted that 40% of full-year net profit would be distributed as dividends and the company had distributed 50% annually for the past two financial years.
What analysts think: At present, HLIB is the only research house keeping tabs on Homeritz. Its coverage began in March 2015 and it currently has a “buy” call on the counter with a target price of RM1.21 per share.
HLIB has been positive on Homeritz from the start of its coverage. This land acquisition is a good deal, the research house opined, as the price is fair and the location of the land indicates a future expansion of production capacity.
Going forward, the research house is positive on the potential benefit of the strengthening US dollar to the company, while noting that the company’s revenue and profit after tax, amortisation, and minority interest is expected to grow at 8% and 21% in terms of compounded average growth rate between FY14 and FY16.
“FY15 dividend yield… still attractive at 3.8%, based on 40% payout ratio,” wrote HLIB analyst Nick Foo.
However, there is still some risk going forward for Homeritz, added the research house.
Among others high raw material prices, high labour costs, and risks associated with production and operations may pose some risk to the company’s performance. A previous HLIB report noted that 500 of the company’s 600-strong workforce are foreign workers. A weakening of the US dollar may also bring negative impact.
Earnings forecast:
StockStalk: The profile of Homeritz indicates a solid operation with good track record and solid fundamentals.
Financially the company is strong footing. Total assets at RM118 million as at Feb 28, 2015 far outstrip total liabilities of RM13 million. In current terms, its current assets stand at RM85 million – including RM47 million in cash position – against current liabilities of RM9 million.
In terms of business prospects, things look stable for Homeritz. The implementation of goods and services tax (GST) beginning April 1, 2015 has not impacted its costs, said a company official to KINIBIZ, as the input tax is reclaimable. As for the effect of this on cashflow, the official said there has been no material impact and its cashflow remains manageable.
Going forward, a research report by the Centre for Industrial Studies published in July last year forecast a demand growth of 3.4% growth in 2015 for furniture in general, and it said this growth is likely to include that of upholstered furniture, a segment worth approximately RM230 billion.
More currently, the strengthening of the US dollar has been a boon for Homeritz, though a company official declined to provide comment on how earnings are impacted specifically. Some 99% of its products are sold in the US dollar, while 30% of total production cost is in the ringgit, said HLIB.
According to a previous HLIB report, every RM0.10 per US dollar appreciation will boost FY15 net profit by about 6%.
Overall, Homeritz seems a solid dividend play for investors with a long-term horizon. Its consistent profitability and strong earnings provide comfort, while the presence of its founders as major shareholders in charge of running the company will likely ensure a consistent threshold of dividend payout.
However, a major concern is valuation. The surge of over 100% over the past year indicates that plenty of investors have found this hidden gem despite the scarce coverage by research houses.
At the close of trading on July 28, 2015, Homeritz was trading at a price-earnings (P/E) ratio of about 16 times – this is double the average P/E of eight times for the furniture industry, according to a previous HLIB report. In addition, there remains the possibility that the current strengthening of the US dollar may reverse at some point.
However, this particular point again comes back to the investor’s investment horizon. As a pure dividend play, there may be better yields to be found on Bursa Malaysia, but with consistent dividends and stable outlook, Homeritz may have legs still to rise further in the long run.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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