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Monday, January 16, 2017

Homeritz eyes double-digit revenue growth for FY17

This article first appeared in The Edge Financial Daily, on January 16, 2017.

KUALA LUMPUR: Export-oriented furniture makers, which are expected to benefit from the stronger US dollar, are back on investors’ radar following Donald Trump’s unexpected win in the US presidential election.

One such company is Johor-based upholstery home furniture manufacturer Homeritz Corp Bhd which targets to achieve a double-digit growth in revenue for the financial year ending Aug 31, 2017 (FY17).

Homeritz founder and managing director Chua Fen Fatt said he is optimistic about FY17 and believes that the company will continue to grow steadily, supported by the stronger greenback.

“As long as the US dollar trades above the 4.2 level [against the ringgit], it will be very good for the furniture makers,” said Chua, who has 30 years of experience in the industry.

“Every year we have been growing steadily in revenue and earnings. We target a double-digit growth in revenue for FY17 as we introduce more new products,” the low-profile founder told The Edge Financial Daily at the company’s headquarters in Muar.

For FY16, revenue rose 7.61% to RM157.57 million from RM146.42 million in FY15.

Net profit, meanwhile, has registered a double-digit growth over the past three years. For FY16, it rose 19% to RM28.03 million from RM23.55 million a year earlier.

Chua said the government’s decision to lift the freeze on the hiring of foreign workers for several sectors, in May last year, has also helped the industry, which faced a major labour shortage earlier in the year.

Homeritz, for instance, saw its sales volume decline in FY16, mainly due to reduced manpower after the labour freeze was implemented in March.

“The labour-shortage issue we faced last year has improved,” said Chua, adding that the company has received the green light to bring in more foreign workers.

Chua said the company’s production cost for FY17 will be higher but fortunately as an exporter, with 99% of its revenue denominated in US dollar, it has a natural hedge and the rising cost is cushioned.

The bulk of the company’s production cost can be attributed to raw materials, including leather which is mainly imported from India and Brazil, and foam which is sourced within Malaysia. Homeritz also uses stainless steel and oak wood in its production.

Founded in 1997, Homeritz is an integrated designer, manufacturer and exporter of a complete range of upholstered home furniture, comprising leather and fabric-based sofas, dining chairs and bed frames.

Today, the company operates five factories at the Bukit Bakri Industrial Park in Muar. A sixth factory, mainly to assemble furniture, is currently undergoing renovation and is expected to start operating next month.

“This factory is expected to have an output capacity of 10% and will increase gradually in the following years,” said Chua.

In 2015, Homeritz bought 10 acres (4.05ha) of land within the Bukit Bakri Industrial Park for future expansion.

Homeritz, which was in a net cash position of RM57 million as at Aug 31, 2016, usually spends RM2 million annually as capital expenditure to upgrade the machinery in its factories.

Chua said the company will progressively expand its capacity due to skilled-labour constraints.

Homeritz is also comfortable with its current business model with no single customer contributing more than 20% of its revenue. Its largest customer contributed 12% of its sales in FY16.

About 80% of the company’s income comes from original design manufacturing, which fetches a better margin, and the remaining 20% is derived from original equipment manufacturing.

“Moving forward, we will continue to develop new designs and focus more on manufacturing made-to-order niche products, designed by ourselves,” said Chua, adding that Homeritz has no plans to diversify its business.

The company currently exports its products to more than 50 countries, mostly in Asia and Europe. It will continue to keep its customer base diversified with a plan to put greater emphasis on the South America market in FY17.

When asked about the Bank Negara Malaysia measure that requires exporters to convert at least 75% of their proceeds into ringgit, Chua said it will have a minimal impact on the company.

Last month, Hong Leong Investment Bank analyst Sia Ket Ee said in a note that the ringgit’s decline against the greenback bodes well for Homeritz, as 99% of its revenue is denominated in the US currency, while only 40% of total production cost is denominated in US dollar.

“Our sensitivity analysis indicates that every 10 sen depreciation in the ringgit against the US dollar will boost Homeritz’s FY17 to FY18 bottom line by 6% to 7%,” he wrote.

Homeritz, which has been consistently paying dividends to shareholders, will continue to declare about 50% of its net profit as dividends, said Chua, who owns a direct stake of 34.42% in the company. His wife, Tee Hwee Ing, who is also the executive director, has a direct interest of 21.67%.

When asked about the biggest challenge for the industry, Chua said: “It’s the government’s flip-flopping policy changes.”

Over the last 12 months, Homeritz’s share price has declined by 12.71%. Last Friday, it closed at RM1.03, giving it a market capitalisation of RM309.01 million. It is currently trading at a trailing 12-month price-earnings ratio (PER) of 11.03 times compared with the industry’s average of 8.9 times.

Its closest peer SWS Capital Bhd, which manufactures and sells upholstered sofas and dining furniture, is trading at a trailing12-month PER of 39.59 times.

Hong Leong IB Research, the only research house which closely covers the stock, has a “buy” recommendation, with a target price of RM1.11.

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