Homeritz Q4 FY20 Review

Homeritz recorded a higher revenue and profit despite covid-19 and global political uncertainties!

It was a commendable quarter result. Homeritz recorded its revenue and PBT for Q4 FY20 with an increase by 37.8% and 73.3% respectively compared with the corresponding period last financial year. This was primarily contributed to the increase in volume sold, lower material cost and forex gain.  

The management has made a great improvement for its FY20 performance despite the unprecedented operation interruption imposed by government during the financial period. The group recorded an increase on its revenue and PBT by 5.2% and 10.2% respectively compared with the corresponding period last financial year. 

The management reported that due to the operation interruption (MCO) happened in Q3 FY20, the group's revenue and PBT for Q4 FY20 increased by 90.3% and 203% respectively compared with the Q3 FY20.

Balance Sheet Comparison Q3 FY20 & Q4 FY20

Homeritz is a net cash company with a net cash per share of 25.72sen. Translating into the current share price, 30% of the current share value (RM0.855 as of 28/10/2020 closing price) is the company's net cash.

Also, we see the management has stocked up inventories from RM 26.9mil (Q3 FY20) to RM32.8 mil (Q4 FY20). Trade and other payables have also gone up to RM 19.3 mil from RM10.7mil. We can predict that the group has more sales orders coming in next quarter, Q1 FY21. 

Lower Raw Material Cost- The Key Factor

Public Invest reported that leather is one of the main raw materials sourced by Homeritz as it accounted for about 50% of total raw material cost. Recently, the price of its raw leather from India have been trending downward, resulting in margin expansion since FY19. 

RM/USD Continues to Remain Bearish! 

The group's earnings are mainly derived from exports and sales are mostly transacted in USD. I anticipated that the profit from forex gain would continue as the current political upheaval in Malaysia, it might further weaken the RM/USD. As those raw materials like leather and fabric which mostly imported can also provide a natural hedge against currency fluctuation. 

Technical Analysis 

The shock price has rallied around 140% from the lowest point during the MCO was imposed. I am a conservative trader, I didn't buy at the fall nor rebound until the trend has shown a strong buying signal, I entered. That was on 11th Aug 2020, where price had broken up EMA 200 and stayed above for three trading days; the famous bullish signal trend. 

The price has continuously making higher high and higher low points and the next resistance point would be around RM0.983 and the support line is at RM0.825. 

Comments:

- Q4 FY20 was slightly below my expectation as in my previous review on Homeritz, I reckoned that EPS to be 2.66sen. But the stock price has exceeded my target price.

- As I shown earlier, higher stocking up in inventories and also many countries are still in "work from home" status which can further stimulate the interest in home furniture. Hence, I believe the coming quarter can still generate high profit margin.

- Based on Homeritz's track record, Q1 and Q4 usually will have higher revenue and profit. I anticipate that the coming Q1 FY21 can achieve 2.6sen of EPS supported by the continue weakening in RM/USD and raw material cost remains low.  

- TP of RM0.928. 

By taking FPE of 12, Forecast Q1 FY21 to be 2.6sen. Remaining Q2 = 1.93sen, Q3 = 0.82sen and Q4 =2.39sen. 

Forecast EPS/year = 7.74sen

Target price = 12 x (7.74/100) = RM 0.928  

- The bullish trend is able to sustain as the recent corporate announcement of bonus issue and free warrant will attract and retain shareholders. 

- Lastly, a 1.5sen final dividend was proposed by the management that bring the DY down to 1.75%. In such an unprecedented business interruption condition, even blue chip companies have announced to delay the dividend payout. At least Homeritz can still pay dividend! 

Overall, I still maintain my bullish view on Homeritz.