Rhong Khen International Bhd (RKI) FY23 core PATAMI of RM41.6mn was above our and consensus expectations, making up >100% of FY23 forecast for both. In FY23, RKI’s revenue and earnings dropped by 14.1% YoY and 21.1% YoY respectively, dragged by reduced sales registered across all divisions of the group as a consequence of shipment deceleration and decreased order intake. Going ahead, we anticipate RKI to register a lower PATAMI in FY24 due to lower demand from export market, in-line with current inflationary pressure as well as recession fears. Maintain HOLD on RKI, with unchanged TP of RM1.37.

• Above expectations. FY23 core PATAMI of RM41.6mn was above our and consensus expectations, making up >100% of FY23 forecast for both. The main deviation against our forecast was mostly due better-than-expected furniture sales in 4QFY23.

• Dividend. RKI has proposed final DPS of 3.0 sen in 4QFY23 (vs 4Q22: 5.0 sen). This brings a total FY23 DPS of 4.0 sen (vs 6.0 sen in FY22), at only 67% of our FY23’s DPS estimate of 6.0 sen.

• QoQ. In 4Q23, RKI top-line increased by 33.8% YoY to RM131.0m on the back of general enhancement in sales within the furniture division, particularly from the plant in Vietnam due to increased shipments in the current quarter. As a results, RKI’s recorded core net profit of RM27.3mn in 4QFY23 as compared to core net loss of RM6.0mn in 3QFY23.

• YTD. In FY23, RKI revenue plunged by 14.1% YoY dragged by reduced sales registered across all divisions of the group as a consequence of shipment deceleration and decreased order intake. In tandem, the group recorded lower net profit of RM21.9m. However after taking into account exceptional items (net realised & unrealised loss on foreign exchange) amounted to RM19.8mn, the group registered core earnings of RM41.6mn (-21.1% YoY).

• Outlook. Going ahead, we anticipate RKI to register a lower PATAMI in FY24 due to lower demand from export market, in-line with current inflationary pressure as well as recession fears. Aside to that, we foresee continued growth in the demand for second-hand furniture, given its affordability as an alternative to purchase new products. Consequently, this may pose a threat to RKI's earnings in the foreseeable future, as consumers are more likely to spend less on discretionary items due to the higher cost of living. Nonetheless, we anticipate earnings improvement from RKI in FY25/FY26, albeit at a softer rate. This improvement will be supported by higher US housing demand, resulting from the easing of recession fears.

• Forecast. Despite a significant increase in RKI's earnings in FY23, we are not making any changes to our future earnings forecasts. Historically, RKI has displayed a downtrend in earnings for the past two years, with a decline of -34.0% YoY in FY22 and -38.5% YoY in FY23. As a result, we are adopting a conservative approach in our future earnings forecast. Note that we also introduce our FY26F earnings.

• Maintain HOLD, TP: RM1.37. We maintain HOLD on RKI with 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. Note that RKI's stock price has experienced a YoY decline of -6.62% YTD, attributable to the challenging conditions within the global furniture sector.

Source: BIMB Securities Research - 25 Aug 2023