HOMERIZ (5160) - HOMERIZ - The Usual Suspects (F)
Introduction
In previous post, we conducted a Business Analysis on HOMERIZ, introducing The Usual Suspects to consider when analyzing exporting manufacturers with little or no economic moat like HOMERIZ. In this Financial Analysis, we will first present the superb financial track records of HOMERIZ, followed by how it was impacted by The Usual Suspects, and finally conduct a valuation to determine if the current price of HOMERIZ is attractive.
In previous post, we conducted a Business Analysis on HOMERIZ, introducing The Usual Suspects to consider when analyzing exporting manufacturers with little or no economic moat like HOMERIZ. In this Financial Analysis, we will first present the superb financial track records of HOMERIZ, followed by how it was impacted by The Usual Suspects, and finally conduct a valuation to determine if the current price of HOMERIZ is attractive.
Income Statement
Illustration 1: Profitability of HOMERIZ over the 5 Financial Years
Illustration 2: Profit Margin of HOMERIZ over the 5 Financial Years
Illustration
1 & 2 shows a clear uptrend in HOMERIZ profitability and profit
margin over the past 5 financial years under coverage. The Group
achieved CAGR of 9% in Revenue, 9.8% in Gross Profit and 13.4% in Net
Profit. There has also been clear margin expansion in Net Profit Margin,
EBIT Margin and Gross Profit Margin for the Group.
However,
we must not forget the figures in Illustration 1 & 2 are highly
affected by the strengthening of USD against MYR over the past few years
as indicated in Illustration 3 below.
Illustration 3: USD/MYR 5 Year Chart
From
Income Statement, we are able to see Revenue and Net Profit of a
company, but we couldn't tell how much of the growth was attributed to
strengthening of USD as such information was not disclosed in
details. Let's look at excerpts from Financial Reports below:
Taken from HOMERIZ 1QFY17 Financial Report
Taken from HOMERIZ 3QFY16 Financial Report
Taken from HOMERIZ 2QFY16 Financial Report
Therefore, it is really difficult for us to measure the real performance of HOMERIZ without taking currencies into account.
It is also important to know the geographical classification of HOMERIZ's revenue, which is shown in illustration 4 below.
Illustration 4: Revenue classification of HOMERIZ by geographical areas
Despite
the revenue of HOMERIZ is heavily focus in Americas & Europe and
Asia Pacific (mostly Japan), HOMERIZ client base is well diversified
with only 2 customers with revenue equal to or more than 10% of Group
revenue. The managing director Chua Fen Fatt also mentioned that the
largest client of the Group contributed only 12% to the Group's revenue
in FY16.
Taken from HOMERIZ FY16 Annual Report
Balance Sheet
Illustration 5: Balance Sheet of HOMERIZ from FY12 to TTM1QFY17
Illustration 6: Liquidity Ratio of HOMERIZ from FY12 to TMM1QFY17
From
Illustration 5, we can see that HOMERIZ has been a net cash company in
all the years under coverage. It has also turned debt free in FY16.
Illustration 6 shows even more impressive financial ratios, with current
ratio, quick ratio and cash ratio stays above 8x, 6x and 4x
respectively, far surpassing our standards of 1.8x,1.4x and 0.5x.
Liquidity ratios analyze the ability of a company to pay off both its
current liabilities as they become due as well as their long-term
liabilities as they become current. In the case of HOMERIZ, it is quite
safe to ask the question: What is the worst thing that could happen?
Cash Flow Statement
What
good is a company that can earn profit and be asset rich BUT fail to
generate cash flow? I know we have repeated this many times but it's so
important that readers should expect us to mention this over, and over,
and over again. Instead of merely looking at the cash flow figures of
the company, we like to assess a company's cash flow generating
capability by analyzing its FCF (Free Cash Flow). FCF is derived by
deducting CAPEX (Capital Expenditure) from CFFO (Cash Flow from
Operating Expenses). A company with strong FCF is more likely be able to
increase dividend to shareholders, which in turn lead to increase of
share price.
Illustration 7: CFFO, CAPEX and FCF of HOMERIZ from FY12 to TTM 1QFY17
Illustration
7 shows the strong CFFO and FCF of HOMERIZ over the financial years
under coverage. The sudden increase in CAPEX in FY16 (which result in
lower FCF) was due to the purchase of 10 acres of land within the Bukit
Bakri Industrial Park for future expansion.
Illustration 8: Cash Flow Checklist of HOMERIZ
Illustration
8 shows the Cash Flow Score of HOMERIZ in TTM1QFY17 and FY16. We opine
HOMERIZ has a very strong cash score of 85%. The usual CAPEX of HOMERIZ
ahs been around RM 2 mil each financial year. The purchase of Bukit
Bakri Land in FY16 has affected the cash flow score in the two financial
years in illustration 8. If we exclude it, the cash score of HOMERIZ
would have been close to PERFECT.
The Usual Suspects
# Usual Suspect 1: FOREX
Yes
we know, we have promised to show readers the performance of HOMERIZ
without taking the strengthening of USD into account. The truth is, we
can't give you the exact figure, but we can try to get an idea using
currency analysis.
Illustration 9: Revenue growth of HOMERIZ vs USD/MYR
Illustration
9 shows HOMERIZ revenue growth (qoq) and USD/MYR growth (qoq) from
1QFY15. 1QFY15 is being used in this illustration as it marked the
beginning of USD strong strengthening (refer to Illustration 3). Please
note that HOMERIZ financial year end is August, so the average exchange
rates you use for 1QFY15 should be Sept - November 2014.
Illustration 10: Inference of HOMERIZ volume growth
The
figures in Illustration 10 was derived by deducting USD/MYR growth from
Revenue growth. Yes, as we mentioned earlier, these figures can't be
precise. but this the best we can get with available data. Here are the
things Illustration 10 fails to take into considerations:
1)
Revenue in USD - Approximately 99% of HOMERIZ revenue is denominated in
USD. However, this is just a rough figure. In Illustration 10 we assume
100% of the sales derived in USD, and sometimes that 1% can make big
difference.
2)
Elasticity of demand - In Illustration 10, we assume sales volume of
HOMERIZ would not have been affected by the strong USD. However, this is
not necessarily true. A strengthening in USD would give more purchasing
power to some clients and make HOMERIZ products relatively cheaper,
which in turns leads to higher revenue volume.
3)
Average foreign exchange rates - We use average USD/MYR in Illustration
9 to estimate revenue volume growth in Illustration 10. In reality,
however, revenue was transacted in USD and the exchange rate used
depends on the rates upon conversion in the quarter. Using average forex
exchange rates is just the best alternative we have. Below two excerpts
from HOMERIZ 1QFY17 and 4QFY16 show the volume growth (qoq) of HOMERIZ,
which is 20% in 1QFY17 and -15% in 4QFY17. It is not very far from our
estimation in Illustration 11, which is 19.41% in 1QFY17 and -17.5% in
4QFY17.
Taken from HOMERIZ 1QFY17 Financial Report
Taken from HOMERIZ 4QFY17 Financial Report
# Usual Suspect 2: RAW MATERIAL
In
previous post, we mentioned leather hides is the main raw material of
HOMERIZ, which makes up to 40% of total production costs. Even though in
HOMERIZ annual reports, the managing director again and again mentioned
increase price in raw material and fluctuations in foreign exchange
rates are the main challenges, we opine HOMERIZ has the ability to pass
down its higher raw material cots to its clients.
Illustration 11: Leather Hides price 5 year chart Source: http://www.indexmundi.com
Illustration
11 presents Leather Hides price over the past 5 years. We can see that
leather price has experienced an uptrend in mid of 2013 and reached
historical high price in end of 2014. However, in Illustration 2 above,
we can also see HOMERIZ's capability to maintain its gross profit margin
above 40% even at the time when the raw material cost was at peak.
Please take note that leather price are trade in USD so this finding of
ours couldn't have been distorted by strong USD at the year under
coverage.
Valuation
Illustration 12: Comparison table among few furniture exporters listed in BURSA
Illustration
12 compares 5 listed furniture exporters which are on our radar. While
looking at HOMERIZ alone, its latest 6.72x EV/EBIT looks undervalued
(our standard EV/EBIT is 8x). Assuming EV/EBIT of 8x, the target price
of HOMERIZ should be RM 1.13, providing 15% potential upside at time of
writing.
However,
EV/EBIT, P/E and P/B are relative valuation methods, which mean they
are more meaningful when comparing among their peers. From Illustration
12, we can see that HOMERIZ is relatively higher in valuation compared
to HEVEA, JAYCORP, LIIHEN and POHUAT (ohhhh but HOMERIZ investors,
please don't be too hard on yourself. In Stockify, we are very picky and
selective when comes to in our stock picks, so naturally stocks on our
radar are always lower valuation). On the other hand, HOMERIZ is also,
among the peers, one of the furniture exporters with highest net profit
margin and management efficiency ratio.
Conclusion
When conducting Financial Analysis on
HOMERIZ, we are very impressed with its track record and regard it as
the all rounder, who scores perfectly in Income Statement (capability to
make profit), Balance Sheet (capability to remain safe in book and
protect its shareholders ) and Cash Flow Statement (capability to
generate FCF and rewards its shareholders). However, in terms of
valuation, Investors must also pay higher valuation as the price to be
the owner of the all rounder like HOMERIZ.
It is also very important to know The Usual Suspects when analyzing manufacture exporters like HOMERIZ. In previous post, we
concluded #Usual Suspect 3: LABOUR, is the biggest constraint for
HOMERIZ to expand. In this post, we presented how #Usual Suspect 2: RAW
MATERIAL, shouuld not be too much of a concern to HOMERIZ given its
ability to pass down the cost to the customers. However, the #Usual
Suspect 1: FOREX, serves like a double edge sword, recent surge in USD
has contributed to good revenue and good profit margin to the group,
which result in higher ROE, ROIC, CROIC in Illustration 12. A reversal
in USD could make valuation adjustment in HOMERIZ, this is a fact
investors must be aware of.
References:
The Edge Financial Daily 26 January 2017
HOMERIZ Annual Report FY2011 to FY2017
HOMERIZ Financial Report 1QFY17, 1QFY16-4QFY16, 1QFY15-4QFY15, 1QFY14-4QFY14.
http://www.indexmundi.com
http://www.x-rates.com
HOMERIZ (5160) - HOMERIZ - The Usual Suspects (F)
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