Q3 FY20 results was the worst since 2013 until now. But, it was above my estimation as I reckoned a loss making quarter would be announced in my previous review.
Overall revenue and PBT were reduced by 35.12% and 61.86% respectively compared with the corresponding period last financial year. Gross profit decreased from 18% to 7% mainly due to lower revenue recorded under this quarter. As I assumed Q3 would only be able to operate in mid of April with limited work force; like others, surprisingly the management mentioned that the Group started to operate since early of April. How the management did that is really raised my eyebrows. On 4th of May, all workers are allowed to come back to work. In short, a halt in their business operation for just half month.
The group's revenue and PBT of 9MFY20 decreased by 4.44% and 5.63% respectively compared with the corresponding period last financial year. The decrease in revenue and PBT as mentioned in Q3 report were mainly due to the lower output.
The Group’s revenue and PBT for the Q3FY2020 decreased by 43.51% and 55.82% respectively compared with the Q2FY2020. The decrease of revenue and PBT were mainly attributed the lower output as a result of business and operations faced temporary interruption during Q3FY2020 pursuant to the outbreak of the Covid-19 pandemic in Malaysia.
Anyhow, I still suspicious on their financial performance. So, let's look into their assets management report whether the better profit recorded was contributed from clearing pending orders or old stocks.
By comparing Q2 and Q3 FY20 reports, inventories were increased while trade and other receivables were not greatly reduced. Yet, trade and other payables were reduced. With those figures, I can conclude that Q3 revenue were from the output produced under the reporting period.
Comments:
1. Overall I am satisfactory with Q3 performance. The performance is aligned with the sales trend in US partly stimulated by low interest rate.
2. HLIB analysts reported that during the interview with Homeritz and Liihen managements, sales orders have been picking up recently to the level at the early of the year.
Commented from HLIB analyst that:
"We expect the full impact of Covid-19 to be felt solely in 3Q19. From June onwards, we understand sales volumes have returned to pre-Covid-19 levels of 200+ containers per month. Going forward, US-China trade war will continue to result in US retailers and wholesalers increasing orders from countries outside of China. We expect Homeritz continue to benefit from this trend, as we note that sales to the US has increased from 4.5% of total FY19 sales to >12% currently. In terms of raw materials, Homeritz have guided that its supply chain has been relatively stable. Homeritz also mentioned it has been able to procure leather from India at a cheaper price."
3. Future prospect is looking good for Homeritz. By assuming that the Q4 FY20 EPS to be 2.66sen, similar to Q1 FY20 performance in revenue and PBT, the FY20 EPS would be Q1 2.66sen + Q2 1.93sen + Q3 0.82sen + Q4Forecast 2.66sen = 8.07sen
Taking PE = 8~10, target price to be RM0.65~0.81 (12~39.7% upside with current price at RM0.58)
Also, a buy call from HLIB at a target price of RM0.72
4. Risk that sales to be disrupted will be global political uncertainty such as US-China trade war, foreign workers shortage issue and second wave of covid-19 pandemic.
In the news recently, the government has decided that only three sectors: construction, plantation and agriculture will be allowed to employ foreign workers in future to cut the nation's reliance on foreign workers.
Technical Analysis:
The stock price is moving in a slow and steady uptrend. Recently, Homeritz has lost its bullish momentum. Overall, the price is still making higher high and higher low. Next support point would be 0.56 & 0.54.
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