- A global home furniture exporter. Homeritz Corporation Bhd (HOMERIZ) is a renowned integrated designer, manufacturer and exporter of high-end upholstered home furniture. The Group primarily undertakes Orignal Design Manufacturing (ODM), under the name Eritz and Original Equipment Manufacturing (OEM). HOMERIZ has made its mark in the international market by building a diverse customer base spanning across 55 countries worldwide. Asia-Pacific (especially Australia) and the European regions are the group’s key export markets which accounted for 50% and 28% of its total turnover in FY13. Meanwhile, for the product segmentation, 40% of FY13 turnover came from its Dining segment, followed by the Sofa (39%) and Bed Frame (21%) divisions.

- Edging over its competitors. HOMERIZ is one of the only two players in Malaysia's offering mid-to-high-end upholstered home furniture, catering to the international markets. We have recently visited the group’s manufacturing plant in Muar, Johor and was impressed with the group’s high-quality products manufactured with excellent workmanship that is comparable to other European products sold locally. In order to meet the high international standards requirement, HOMERIZ engages in continuous product development to come up with new designs as well as innovative products.

- Sustainable margin track record. Similar to other export-oriental furniture manufacturers, HOMERIZ’s profitability is also subjected to the fluctuation of raw materials cost as well as foreign exchange rates. To mitigate the risks, management has adopted a short-term (c.6-month) order book and cost-plus strategy. While this strategy resulted in a relatively low earning's visibility, it effectively resulted in sustained margins, which recorded an average gross margin of 44.0% with a net profit margin of c.14.5% since FY10. On top of that, we also understand that HOMERIZ is not subjected to the fluctuation of international freight rates as their customers bear the transportation costs from custom to destination.

- Expecting double-digit revenue growth. The group recorded a strong revenue growth of 43% YoY (to RM35.6m) in 1Q14, thanks to a better economics of scale and stronger US dollar. Despite the strong revenue growth in 1Q14, we are merely targeting its revenue to climb at a conservative 10% YoY growth in FY14 due to its low earnings visibility. We believe the recovery of the European region economy as well as better economics of scale will be the key drivers to its top-line growth in FY14. Coupled with the sustainable margins, net profit is expected to record at RM16.7m (10.6% YoY).

- An attractive dividend payout. While the group does not have an official dividend payout policy, we understand that HOMERIZ intends to pay out at least 40% of its net profit to shareholders. Note that, the group has been consistently rewarding its shareholders by declaring an annual DPS of 2.2-5.1 sen (representing >40% dividend payout) since FY10.

- Not rated with a fair value of RM0.83, based on a targeted 10.0x FY14 PER (which is in line with the group’s historical 5-year average PER and a discount to small cap average Fwd. PER of 11.6x). Meanwhile, we also estimate the Group to pay out 50.0% of its net profit to shareholders, which will translate into a DPS of 2.5 sen or 3.1% yield.

Source: Kenanga

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