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LIIHEN (7089): LII HEN INDUSTRIES BHD - Beneficiary of Covid-19 continues to shine

Lii Hen’s 3Q20 Core PATAMI of RM30.5m (QoQ: +221.4%, YoY: +35.6%) Brought 9M20’s Sum to RM58.5m (-1.4% YoY), Accounting for 83.0% of Our Full Year Estimate. After Accounting for Stronger Sales Going Forward, We Raise Our FY20/21/22 Earnings Forecasts by 5.4%/4.3%/3.4%. Post Higher Earnings Multiple and Changes in Forecasts, Our TP Rises From RM4.08 to RM4.96 Based on 10.5x FY21 Earnings.

Above expectations. Lii Hen’s 3Q20 core PATAMI of RM30.5m (QoQ: +221.4%, YoY: +35.6%) brought 9M20’s sum to RM58.5m (YoY: -1.4%). The results beat our expectation, accounting for 83.0% of full year estimate. The positive results surprise were due mainly to better-than-expected sales volumes arising from (i) on-going high number of Covid-19 cases in US (key market) translating to consumers buying more furniture for WFH arrangements and (ii) continued US furniture import diversion from China to SEA due to the US-China trade war. Core net profit was arrived after adjusting for foreign exchange gains, gain on disposal of PPE and gain on derivative instruments totalling a net sum of RM0.3m for the 9M20 period.

Dividend. Declared DPS of 5 sen, which will go ex on 3 Dec 2020 (3Q19: 4 sen). 1H20: 10 sen (9M19: 11 sen)

QoQ. Sales more than doubled (+113.7%) due to low base effect. Note that production and shipments were halted for close to 6 weeks in 2Q20. Higher sales volumes coupled with economies of scale resulted in core PATAMI rising by 221.4%.

YoY. Sales increase of 42.1% was mainly due to increased demand for Lii Hen’s products in addition to favourable exchange rate (3Q20: 4.20, 3Q19: 4.16). Core PATAMI grew by a lesser amount (+35.6%) due to higher raw material and labour costs. Note that Malaysia raised minimum wage from RM1,100 to RM1, 200 in major cities in 2020 (including Muar where Lii Hen’s factory is located).

YTD. Despite approximately eight weeks of production disruptions (due to various MCO restrictions), Lii Hen managed to grow revenue by 6.4% due to increased sales of panel products and sofa sets. Core PATAMI was down slightly (-1.4%) due to slightly higher production costs mentioned above.

Outlook. Going forward, we continue to see strong sales due to (i) Covid-19 cases in Lii Hen’s key market (i.e. US) translating to persistent WFH arrangements and hence consumers purchasing more furniture (note that US market accounts for ~75% of Lii Hen’s sales in FY19) and (ii) US based companies diverting orders from China to SEA due to trade tariffs on China made furniture imported into the US. For these reasons, since easing of MCO rules, Malaysia’s wood furniture sales have far surpassed preCovid-19 levels (Figure #2).

Forecast. After accounting for stronger sales going forward, we raise our FY20/21/22 earnings forecasts by 5.4%/4.3%/3.4%.

Maintain BUY. Given the continued spike in cases in Covid-19 cases in the US and therefore strong resulting furniture sales, we raise our PE multiple from 9x to 10.5x (pegged to +2SD above Lii Hen’s 5-year average). After accounting for higher earnings multiple and changes in forecasts, our TP rises from RM4.08 to RM4.96 based on 10.5x FY21 earnings. Note that as of end-Sept, Lii Hen had net cash of RM172.6m (or RM0.96/share).

Source: Hong Leong Investment Bank Research - 23 Nov 2020


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