Homeritz Corporation - Attractive acquisition

News

• Homeritz had on 1 June 2015 acquired the remaining 35% of Embrace Industries Sdn Bhd. (“EISB”) for RM12.17m cash. This will make EISB a wholly-owned subsidiary.
• The principal activity of EISB is to design, manufacture and the sale of metal frames for dining chairs as well as metal based upholstered furniture and furniture parts.
• The Acquisition will allow Homeritz to consolidate all revenue and profit of EISB which in turn, contribute positively to the earnings of the Group as a whole in future.

Highlights

• We are positive on the acquisition as the purchase consideration translates to price of 3x P/E vis-à-vis the group’s pre-acquisition P/E of 11x. It would result in 17% increase in Profit After Tax and 21% CAGR growth in the group’s PATAMI from FY14 to FYE16 (vs. 14% before acquisition).
• The group’s FY15 net cash will reduce to RM52m from RM65m. Balance sheet remained healthy as post acquisition cash is equivalent to 18.6% of market price.

Forecasts

• FY15-16 forecasts raised by 3%-18.5% to reflect positive impact of the acquisition. FY15 upward adjustment minimal given that it will only impact earnings by 2 months.

Rating

• Maintain BUY, TP: RM1.82 (+33% upside)
• Positives: 1) the group could benefit from strong USD; (2) its revenue and PATAMI are expected to grow at CAGR of 8% and 21% respectively from FY14 to FYE16; (3) forecasted FY15 net cash per share of 25.5 sen; and (4) still attractive FY15E DY of 3.7%, based on 40% payout ratio.

Negatives

• : USD weakness; high raw material prices; high labour costs; unexpected economic downturn; and production or operational risks.

Valuation

• Post earnings upgrade, we raise our TP from RM1.54 to RM1.82 based on unchanged 10x CY16 P/E (as the acquisition would increase CY16F adjusted FD EPS to 18.25 sen vs. 15.37 sen).
• Homeritz had proposed a bonus issue (1 for 2 basis) and free warrants (1 for 4 basis). The bonus shares will not be entitled for the free warrants. The proposals announced are expected to be completed by 3QFY15.
• Post-bonus issue, our TP would be adjusted from RM1.82 to RM1.21 while share price will adjust from RM1.37 to RM0.91.

Source: Hong Leong Investment Bank Research - 2 Jun 2015