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. 

Homeritz Q3 FY20 Review

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. 

https://peanutcendol.blogspot.com/2020/05/homeritz-q2-fy20-review.html

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. 

https://www.theedgemarkets.com/node/524024?fbclid=IwAR1Vw6Q2te81yfbIOuZ1fzjB7pi4Sy4qkz1BTQ9dT-gkofuCeNuvMeU-MSk

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.  

Homeritz Q2 FY20 Review

Q2 result was within expectation. Although the performance was slightly deviated from my earlier prediction, due to a sudden one off cost incurred.

The group reported a higher revenue of RM43.144 mil under this quarter with an increase of 6.8% compared with the corresponding period last year. The increase in revenue was mainly contributed from the higher volume sold.

The group mentioned no impact on the reported quarter from the MCO impose as the MCO took effect after the financial quarter. The increase in revenue has also reflected that no impact on overseas market from Covid-19 during the reporting period.

The increase in the Group’s PBT for 1HFY2020 by 28% was mainly attributed to the higher revenue achieved and lower of unit price purchased of certain raw materials compared to 1HFY2019.

Despite higher turnover, the decrease in the Group’s PBT for Q2FY2020 by 2.8% was mainly attributed to the higher one off cost incurred in Q2FY2020 compared to Q2FY2019.

The group does not mention the detail of the one off cost.

Compared to preceding quarter performance, the group gave a similar explanation as mentioned above.

Comment:
1. Q2 FY20 was predicted to contribute a higher revenue mainly due to higher currency rate USD/RM.
2. One off cost incurred under this quarter has drastically reduced the gross margin from 23% in preceding quarter to 13%.
3. The coming Q3 will have severe impacts on the group's profit, as the group might only operate for less than a month due to MCO lock down. In addition, the group suppliers (Europe) and customers (USA) are having lock down in their own countries as well.
4. I expect low operating activities in Q3 and the group financial performance will turn into red. Revenue will decrease near to zero yet high operating costs which causes EPS expected to reach -1.77sen.

5. Notwithstanding the massive city lock down happened globally that might impact the group's sales, I believe the group will regain its performance in Q4 partly due to strong currency and faster economy recovery from USA.  

6. Target price for FY20 with the PE of 8 should be RM 0.35. The target price has considered a loss of profit in Q3 and the loss have weaken the first half financial result. 

Homeritz is still moving in a major downtrend. At the moment no buy signal for this counter. 

Homeritz Q4 2019 Review

A disappointing quarter result!

While market sentiment believe Malaysia furniture sectors will likely be benefited from US China trade tension, the group has reported a fall of 16.18% and 34.63% on its revenue and PBT for Q4 FY2019 compared with the corresponding period of the last financial year.
The management explained in qtr report that this was mainly attributed to the decrease in volume sold. The number of container shipped out decreased by 21% and 13% respectively for Q4FY2019 and FY2019.

In FY 2019, the Group achieved a slight increase in net profit of 1.7% to RM27.7 million despite a

11.26% decrease in revenue to RM147.7 million. This was mainly attributed to the strengthening

of USD and lower unit price of certain raw materials purchased compared with FY 2018. 

Homeritz business is very relying on currency earning. Although profit has been improving compared to last year, the reduction in revenue has threaten the company's future prospect. 

The Group’s revenue for the Q4FY2019 decreased by 10.4% as the result of decrease in volume sold. The number of container shipped out decreased by 15% for Q4FY2019 as compared to Q3FY2019.

The PBT for Q4FY2019 decreased by 33.34% compared with Q3FY2019. This was mainly attributed to the lower volume of products sold to customers, which resulted in lower economies of scale and the one off expenses of about RM188K in relation to the Proposed Bonus Warrants incurred in Q4FY2019. 

Gross profit margin has also reduced from 18% (Q3 FY19) to 13% (Q4 FY19), which is the lowest throughout the year. 

Recent news reported Homeritz has managed to secure 8 new sales orders from US customers. The group is planning to expand its production line to cater for those new orders in 3 to 5 years time. 

However, it will not directly reflect in the next financial year performance. Hence, the drop in sales in FY19 has revealed that actions from management team are lagging behind. New sales orders are unable to catch up with the drop/slowdown in sales from existing customers. 

I forecast that gross profit margin will remain weak in coming FY2020 with the TP at RM0.57 with a 10% discount on its EPS (6.35sen) and PE stands at 9. 

Technical Analysis: 

A weak financial report without any good future prospect can hardly maintain the uptrend momentum. Hence, we look at the first support line at RM 0.64 (MA200) and second at RM 0.60 (double bottom) for signals of bearish trend. 

Homeritz Q2 FY19 Report Quick Review

Financial performance boosted by the greenback appreciation  

The improvement in net profit for this quarter has few key aspects which highlighted in the above.

The risk is that the sales volume to continue slow down in second half year. 

Although Homeritz is enjoying with low material cost, there is no action taken by management to increase its inventories. Hence, I guess that the raw material price will continue to stay lower. 

The increase in PBT is mainly boosted by the greenback appreciation where early year of 2019 the currency stand around RM4.09/USD compared to last year 2018 of RM3.92/USD. However, the 1HFY2019 revenue has dropped by 11.5%, accounting for 46% of previous full year revenue. I expect the EPS for the second half year to be maintained as per last year. Therefore, I can forecast that FY19 EPS would be around 7.18sen ( 3.55sen [1HFY19] + 1.54sen [Q3FY18] + 2.09sen [Q4FY18]). 

The price at FY18 end was around RM0.68 with the PE value of 9.5. 

Hence, my target price for Homeritz based on PE multiple of 10 for FY19 would be RM0.72.