Should We Get Cozy With Homeritz Corporation Bhd?

Homeritz Corporation Bhd (KLSE: HOMERIZ) is a manufacturer and exporter of a wide range of upholstered home furniture such as sofas, dining chairs, bed frames to catered to the preference of medium-to-high end Western consumers in plants based in Muar, Johor. As of 13 December 2019, Homeritz is valued at RM 192.0 million in market capitalisation. Here, I’ll list down 10 key things to know about Homeritz before you invest. 

• Geographical Markets
  Presently, Homeritz exports its furniture products to 40+ nations where they accounted for 95% of total revenues in 2019. The remaining 5% of its revenues are derived locally. The biggest markets are the Asia Pacific and Americas & European regions, where they brought in 52% and 42% of total revenues to Homeritz in 2019.
  
  
  

No.	Geographical Markets	Revenues 2019 (RM ‘000)	Revenues 2019 (%)
1	Asia Pacific	76,792	52.0%
2	America and Europe	61,399	41.6%
3	Malaysia	6,988	4.7%
4	Africa and Middle East	2,530	1.7%
Homeritz’s Group Revenue	147,709	100.0%

• Major Customers
  In 2019, Homeritz derived 30.0% of its total revenues from three major customers. Hence, it is subjected to customer concentration risk. In the case of Homeritz, its total revenues had dropped to RM 147.7 million in 2019 from RM 166.4 million in 2018 due to a substantial drop in orders received from all of its three major customers in 2019.
  
  
  

Main Customer	Revenue 2018 (RM ‘000)	Revenue 2018 (%)	Revenue2019(RM ‘000)	Revenue 2019 (%)
1	23,547	14.1%	19,871	13.5%
2	21,181	12.7%	15,799	10.7%
3	19,613	11.8%	9,236	6.3%
Total Revenue	166,445	100.0%	147,709	100.0%

• Group Revenues
  Beginning in 2011, Homeritz had increased its group revenue to as high as RM 169.0 million in 2017 before dipping to RM 147.7 million in year 2019. The rise in sales, especially from 2015-2017, was attributed to an increase in orders from its 2-3 key customers during the period. But, its sales had faltered resulting from a fall in orders by these customers.
  
  
  

• Profitability
  Likewise, its pattern of profitability has mirrored its sales figures for the past 10 years. Earnings had increased from RM 10.8 million in 2011 to a high of RM 30.9 million in 2017. Soon after, with lower sales orders and higher staff costs, Homeritz had recorded a dip in earnings to about RM 20 million levels in 2018 and 2019.
  
  
  

• Cash Flow Management
  From 2010 to 2019, Homeritz had made RM 218.1 million in cash flows from operations and earned  RM 10.3 million in interest income. Out of which, it has spent RM 51.7 million in net capital expenditures (CAPEX), RM 6.4 million in net long-term borrowings, and had paid a total of RM 97.5 million in dividends to its existing shareholders. As such, Homeritz has effectively lifted its cash reserves from RM 19.6 million in 2010 to a total of RM 45.0 million in 2019.
  
  
  

• Balance Sheet Strength
  In 2019, Homeritz has no borrowings and a total of RM 155.5 million in shareholders’ equity. Thus, it has zero gearing ratio. It has a total of RM 119.0 million in current assets and RM 18.1 million in current liabilities. Thus, it has a current ratio of 6.58.
  
  From its current assets of RM 119.0 million, Homeritz has reported the following:
  
  
  

No.	Financial Assets	Amount (RM ‘000)	Proportion(%)
1	Fixed Deposit with Licensed Banks	49,762	41.8%
2	Cash and Bank Balances	31,977	26.9%
3	Others	37,311	31.3%
Homeritz’s Current Assets (2019)	119,050	100.0%

The fixed deposit has an effective interest rate ranging 3.33% – 4.30% a year.

• Cash Conversion Cycle
  In 2019, Homeritz has the following:
  
  
  

Debtor Days	Inventory Days	Creditor Days	Cash Conversion Cycle
21 Days	115 Days	25 Days	111 Days

Cash Outflows:
Homeritz has taken about 25 days to settle its bills from its suppliers for its raw materials in 2019.

Cash Inflows:
Homeritz took 115 days to take its raw materials to produce and secure sales for its products. Then, after selling its products, Homeritz took 21 days to collect its payment from its customers.


Cash Conversion Cycle:
Therefore, the gap between cash inflows and cash outflows is 111 days. Homeritz would need to set aside 111 days worth of working capital for it to run its operations smoothly.

• Land Acquisitions:
  On 27 February 2019, Homeritz had acquired 4 plots of land within the Muar Furniture Park for a total sum of RM 9.4 million. These land carry a 60-year land lease from the issuance of land titles. Homeritz acquired these lands for the purpose of expanding and relocating its production activities to Muar Furniture Park.
  
  
  
• Major Shareholders
  Chua Fen Fatt and his wife, Tee Hwee Ing are the major shareholders of Homeritz Corporation Bhd with 34.6% and 21.9% shareholdings of the company respectively. Chua is appointed as the Managing Director and his wife is the Executive Director of the company.
  
  
  
• P/E Ratio
  In 2019, Homeritz had reported to make 7.37 sen in earnings per share (EPS). As of 13 December 2019, Homeritz is trading at RM 0.64 a share. Hence, its current P/E Ratio is 8.68. It is below its 5-year P/E Average of 9.85 but it would be meaningful to use P/E Ratio Average if the stock is one that has generated consistent growth in earnings.
  
  
  
• P/B Ratio
  In 2019, Homeritz has net assets of RM 0.52 per share. Thus, its current P/B Ratio is 1.23, which is below its 10-year P/B average of 1.58.
  
  
  

• Dividend Yields
  In 2019, Homeritz has paid out 3.0 sen in dividends per share (DPS). As such, its current dividend yield is 4.69% per year. Similar to P/E Ratio, it would be more meaningful to use past historical averages if it is able to deliver consistent increase in earnings and dividends to its investors for the long-term.
  
  
  

VIA’s Verdict 

The main lesson from Homeritz for investors is to look at its source of revenues. 

Personally, my investment objective is to earn increment dividends for the long run. Thus, it is important to find stocks where the sources of both revenues and profits are stable. A stock that relied on a few key customers for growth in sales and profits would be subjected to concentration risk of these major customers. Thus, I prefer stocks that have a larger pool of customers for the loss of income from one customer is less detrimental to the financial health of the stock. 

But, having said that, Homeritz had demonstrated prudence in its management of cash flow, hence, having a healthy balance sheet with RM 80+ million in cash and zero borrowings. It has the financial strength to withstand any adverse market conditions and to invest and expand its sources of income in the future. 

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