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QuestionsAnalyzing Homeritz Corp Bhd using IQ
Thomas asked 6 years ago

Hi,
 
Recently I came across this listed company in Malaysia, Homeritz Corp Bhd, so I decided to use the IQ quadrant to analyze this company since it passes the 30sec screening.
 
i find that this company is quite interesting in terms of:
 
Business
It basically manufactured upholstered home furniture and sell to wholesalers & retailers overseas (mainly European countries & Asia pacific). It also have its own brand “Eritz”. Their products are aimed at medium to high end consumers.
 
i still find it difficult to figure out what is their Econ moat, does having a diversified clientele count? but from an analyst report it said that they are one of two major home furniture export players in Malaysia.
 
Since 2011, revenue & profit have been increasing. Further, its NP margin were above 10% and its ROE were above 15% over the past 5 years. So if this company have no Econ moat, how they were able to sustain it?
 
As for growth drivers, I’ve read all its chairman statements dated from 2010 onwards and find that they actually manucture steel as well to integrate with one of its product (upholstered dining chair). Also, they have been focusing creating new products and emphasized on cost efficiency. 
 
They also recently acquired a land for construction of factory to increase its capacities, hence benefit from better economies of scale?
 
The risks are the strengthening of RM against USD (which happens recently), increase in labor costs and factory overheads which will eat up its profit margin eventually.
 
Management
The MD and ED together owned 60% of the company share capital. What I’m interested is the vast knowledge that the MD has which I feel that he knows what he is doing.
 
Management’s Capital Allocation behavior? They are very focused with their existing products and doesn’t diversify into other businesses. Instead they are actively diversifying their client base which is good because they will not rely on only 1 major customer, right?
 
Financials 
To cut things short, this company does fulfill the financial quadrants except it’s cash conversion cycle which is above 100 days. 
 
When I compare with its peers, Latitude Tree Holdings Bhd, everything abt Latitude beats Homeritz except for its Profit Margin, ROE & Cashflow to Net income.
 
Valuation
In terms of valuation, it was not really attractive due to its CAGR of 5% based on revenue  since yr 2009 till 2015
which I get the intrinsic value of RM0.85/share using discounted earnings model.
 
I also uses PEG ratio and Price-to-Sales ratio which both also states that this stock is overvalued. Its current dividend yield were only 4%.
 
Overall, this is my analysis. Am I missing something here? Because I’m still practicing it :)

2 Answers
Victor Chng answered 6 years ago

Hi Thomas,
 
We have not look into this business before but there are some pointer you may want to ask yourself
 

  1. Is the furniture business resilient to the economic down cycle?
  2. What the business had done that allow them to consistent increase their revenue and profit?
  3. When you say diversifying how are they actually diversifying their client base? who is their client?

On the side note, it seem that the company is in quite a good net cash position which is a good sign. 

Victor Chng replied 6 years ago

I think one of their closest peers I can find is Man Wah listed in HK

Ang Henry replied 6 years ago

Hi Victor in your opinion how come Man Wah share price went up almost five times since the lowest between 2012-13?

Victor Chng replied 6 years ago

Hi Henry, I did not analyse Man Wah before. The share price may had gone up due to increasing profit.

Thomas answered 6 years ago

Hi,
 
Thanks for your insights. Well, from my understanding about furniture industry is that it kinda depends on the property market. The more ppl buying houses, the demand for furniture will rise. Homeritz has two categories of products:

  1. Original Design Manufacturing (i.e. Eritz)
  2. Original Equipment Manufacturing

In year 2011, its revenue suffers because of an economic downturn as the majority of its clients are in the European countries and during that year it was the euro debt crisis. Hence, the dramatic decline in its revenue and profits.
 
Homeritz clients comprises of wholesalers and retailers. I think the main reason for the management to keep focusing  on diversifying its clientele over 50 countries (balance between European countries & Asia pacific) is so that 1 country’s property market suffers a downturn and its demand drop but the other country may be in better market condition and demand may rise. Hence, a set-off which makes it able to sustain its sales and profits unless there is a global financial crisis happen again.
 
One more thing is, I read this in an analyst report that says HOMERIZ is not subjected to the fluctuation of international freight rates as their customers bear the transportation costs from custom to destination.
 
Well, that’s all I got from digging deeper. But I have 1 more question, can financial ratios be use to gauge whether the company has a great management team?

Ang Henry replied 6 years ago

It’s possible to gauge the management based on financials. For instance having high ROE of >15% with less than 50% debt/equity ratio for at least 5 years represents the true ROE which is beneficial to shareholders.

Thomas replied 6 years ago

Hi,

Thanks for the info. But I’m thinking is there a set of financial ratios that we can use to prove that the management of a company is a good one.

Well, ROE and Debt/Equity can be one of it..what other ratios that we can use?

Victor Chng replied 6 years ago

Hi Thomas,

The information you gave sound logical to me as they are diversifying their client. Based on what you say I think it is a good move by the management.

Financial ratio are one part to access the management. you have to read the past few years annual report and see what the management had done and how do they manage the previous crisis. Check also the things that they have done whether is it align with the shareholder.