Research house remains positive on Homeritz

PETALING JAYA: Hong Leong Investment Bank (HLIB) Research has reiterated its positive view on Homeritz Corp Bhd, driven by a declining ringgit and lower production cost, among others.
The research house said the recent weakening of ringgit against US dollar bodes well for Homeritz as 99% of the revenue is denominated in US dollar, while only 40% of total production cost is denominated in US dollar.
“Our sensitivity analysis indicates that every 10 sen depreciation in ringgit against the US dollar will boost Homeritz’ FY17-18 bottom line by 6% and 7%,” it said.
The research house noted that the furniture manufacturer is also a beneficiary of lower leather cost, which has fallen by 20% since the first quarter of the year. The leather cost accounts for about 45% of total production cost.
The management shared that the current low leather cost will sustain in the near future, which is in turn favourable to Homeritz’ bottom line.
HLIB Research said the company is gradually recovering from shortage of skilled foreign labour, which has been deterring the company from expanding its capacity despite brisk demand, as it has been approved to bring in an additional of 60 foreign workers since October 2016.
Operationally, Homeritz’ fifth production line is on track to commence operation by the second quarter of 2017. The new production line will expand the company’s capacity by another 15%.
Given its aggressive expansion plan, HLIB Research expects pricing competition of Homeritz to heighten within the furniture players.
The research house has raised its FY17 to FY19 core net profit forecasts for Homeritz by 6% to 7%, largely to account for lower leather cost, and the change in the ringgit/US dollar assumptions from RM4.00 to RM4.20.
It is also maintaining a “buy” recommendation on the company with a higher target price of RM1.11 from RM1.06.