• We expect Rhong Khen International Berhad (RKI) FY23’s earnings to be hit by slower demand from the export market stemming from the prevailing inflationary pressures and recession fears.

• However, we expect RKI’s earnings to recover by 2.7% in FY24 to RM18mn, mainly bolstered by an increase in housing demand in the US. Note that, the US market accounted for approximately 90% of RKI's total revenue in FY22.

• We initiate coverage on RKI with a HOLD rating and TP of RM1.37. Our TP is based on 5-year average historical forward PE of 14.8x that is pegged to FY24F EPS of 9.3 sen.

Challenging Period in FY22 due to Covid-19 Pandemic

FY22 proved to be a challenging year for Rhong Khen International Berhad (RKI) as the group grappled with the effects of the Covid-19 pandemic and subsequent lockdown measures implemented by the Malaysian and Vietnamese governments. These restrictions resulted in a reduced number of production days compared to the previous year. However, amidst these challenges, one of RKI’s Vietnam plants successfully implemented the "3 on the spot" approach, which involves conducting production, meals, and rest at the same location during the lockdown, that led to a commendable achievement of breakeven.

Better Years Ahead

Despite the projected challenges for RKI's earnings in FY23 (- 4.2% YoY) primarily influenced by global inflationary pressures, we remain optimistic on the recovery in earnings for FY24 (+2.7% YoY), thanks to the gradual improvement in housing demand within the United States. Furthermore, we believe that RKI's furniture division has the potential to maintain reasonable profit margins ranging from 2.9% to 3.0%, leveraging on its competitive advantage derived from its downstream business operations. However, we adopt a pessimistic view regarding RKI's demand outlook, considering the highly competitive market with low barriers to entry and the growing preference for second-hand furniture.

Anticipate a moderate Dividend payout

Although RKI does not have an established dividend policy, it has consistently provided returns to its shareholders. We expect RKI to declare 6.0sen DPS for FY23-25F, translating into 31%-33% payout and a decent 4.7% yield at current share price.

Initiate Coverage on RKI with a HOLD rating and TP of RM1.37

We initiate coverage on RKI with a HOLD rating and a TP of RM1.37. Our TP is derived from a 5-year average historical forward PE ratio of 14.8x, and projected FY24F EPS of 9.3sen. Moving forward, we foresee a positive trajectory for earnings as we anticipate a gradual recovery in the demand for housing in the US. Nonetheless, it is important to note that the pace of this recovery may be comparatively moderate.

Source: BIMB Securities Research - 30 Jun 2023