Meng Teck is an author, investor and entrepreneur.
Back to Blog
Please read our disclaimer before you proceed.
Did you buy any companies that were operating in the furniture industry last year? If you did and have kept them till 19 September, congratulations, because your return would have been in the range of 19% to 183% as reported by the financial magazine, Focus Malaysia on 19 September. However,will these companies continue to rally and be supported by strong financial performance? Or the rally is just temporary and these stocks will pull back to their previous performance? In conjunction with that, I would like to bring your attention to this company called Homeritz Corporation Berhad.
What sets this business apart from many other furniture companies in Malaysia is that it is also an Original Design Manufacturer (ODM) company,not only Original Equipment Manufacturer (OEM). This means that they manufactures and sells their own design instead of just manufacturing other people's design. This means that their furniture should be able to create recurring customers due to the taste or style of design of this company. This also mean that, they can enjoy higher profit margin compared to other companies and they can't be easily replaced by new competitors who might come in and offer to manufacture furniture at a cheaper price. It should also be noted that they exports most of their products internationally and thus is not that heavily tied to the sales of housings or economy of a particular country.
Revenue and profit have been inconsistent between year 2009 to year 2013. However, their year to date earning has been 22,005,000 which is a 45% growth since 2013. If we take the earnings from 2011 to 2014, it would be an uptrend, however, we will not consider this company as an uptrend as there is no identifiable factor that can ensure this uptrend as I know of.
Rags to Riches
The management is a couple duo force. This is a classic rags to riches story where neither of them had high education background. Chua was only educated to SRP level while Tee to SPM. Their success is a combination of prudent business deals,investment,hard work and savings.
Strong Financial Position with little debt, strong cash position. Receivables at normal level.
Healthy Cash Flow, Operation Cash Flow doesn't differ much compared to earnings. Very little cash needed to be invested into the business again. Refer below. (Strong Free Cash Flow)
How's the ROE? What is the valuation? (Source: I3Investor)
Using 10 Years DCF. Assuming FCF at 20 Million and Growth rate of 10% and Discount Rate of 4%. We value this company at 212 +87 (Net Asset) = 299 Million. As of 23.10.2014,12.02pm, it is selling at 156 Million. Price is what you pay, value is what you get, we come to a margin of safety of close to 50%.
We value it should be worth 1.50 per share if the value is fully recognized.
Valuation Checklist: At Price of 0.78 Per Share
PE - 7.09 (Okay) (Industry Average PE at 7 if compared with other furniture stocks)
DY- 4.79% (Fair)
PTB - 1.77 (Mediocre)
1)Business Model is good compared to others
2)Management is deemed competent and has aligned interest (Trying to focus more on ODM)
3)Strong Financial Position to weather any difficulties
This is not a recommendation to buy or sell. The author is not responsible for any loss,liability or risk incurred as a result of the use of this content.
At the time of writing, the author does not own any of the company's share. The case study is purely for educational purposes.