Lii Hen’s 2Q20 core net profit of RM9.5m (QoQ: -48.7%, YoY: -48.1%) brought 1H20 sum to RM28.0m (YoY: -24.0%). This accounted for 42.6% of our full year forecasts. We deem this in line with our expectations, as we expect 2Q20 to be Lii Hen’s weakest quarter in FY20 due to the impact of Covid-19 on order volumes and production operations. Forecasts remain unchanged. We maintain our BUY call and TP of RM3.65 pegged to 9x mid-FY21 earnings.
In line. Lii Hen’s 2Q20 core PATAMI of RM9.5m (QoQ: -48.7%, YoY: -48.1%) brought 1H20 sum to RM28.0m (YoY: -24.0%). The results accounted for 42.6% of our full year forecast. We deem the results within our expectation, as we expect 2Q20 to be Lii Hen’s weakest quarter in FY20 due to the impact of Covid-19 on order volumes and production operations. Core net profit was arrived after adjusting for foreign exchange gains, gain on disposal of PPE and gain on derivative instruments.
Dividend. Declared DPS of 2.5 sen goes ex on 14 Sep 2020 (2Q19: 3.5 sen). 1H20: 5.0 sen (1H19: 7 sen)
QoQ. Sales shrank -31.1% due to impact of MCO on sales volumes. Note that Lii Hen had shut down production operations for approximately six weeks in 2Q20 comp ared to just two weeks in 1Q20 (Lii Hen only returned to full production capacity in mid May). Core PATAMI declined by a larger rate (-48.7%) due to fixed portion of cost structure.
YoY. Despite favourable weaker ringgit strength during the quarter of RM4.29/USD (vs RM4.14 in 2Q19), core PATAMI declined -48.1% due to MCO restrictions on production operations (which resulted in higher fixed operating cost).
YTD. Revenue and core PATAMI shrank -12.7% and 24.0% respectively, mainly due to decline in the number of shipments of bedroom sets during the eight weeks of MCO.
Outlook. As expected, sales in 2Q20 were significantly weaker QoQ and YoY. We expect 2H20 earnings to rebound strongly as we understand that order volumes have already returned to pre-Covid-19 levels (i.e. Jan-Feb) as lockdown rules in America (which accounted for ~75% of Lii Hen’s sales in FY19) have loosened. Furthermore, due to the on-going US-China trade war, we expect Malaysian furniture makers to continue to benefit from increased orders as companies from the US divert orders from China to the SEA region. While many believe Vietnam will be a key beneficiary, we note that the cost of labour in Vietnam has risen dramatically in recent y ears, reducing its attractiveness as a manufacturing hotbed. Figure #2 shows the narrowing cost of labour between Malaysia and Vietnam. With this narrowing gap, Lii Hen is well poised to benefit from increased orders from the US. Note that even with the cost of labour gap over the past seven years, Lii Hen has shown an average sales growth of >10% in USD terms.
Maintain BUY. We maintain our BUY call and TP of RM3.65 pegged to 9x mid-FY21 earnings. At current price levels, Lii Hen yields a decent 5.3% based on 45% dividend pay-out ratio. As of end-Jun, Lii Hen has a net cash position of RM138.9m (or RM0.77/share)
Source: Hong Leong Investment Bank Research - 24 Aug 2020