• We expect Rhong Khen International Berhad (RKI) FY24’s earnings will 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 3.6% in FY25 to RM18.6mn, mainly due to higher US housing demand, which results from the easing of recession fears.

• Conversely, furniture export demand from the US is expected to experience a downward trend in the near term.

• Maintain our HOLD recommendation and unchanged TP of RM1.37. Our TP is derived from a 5-year average historical forward PE ratio of 14.8x, and FY24F EPS of 9.3sen.

FY23 results recap

To recap, RKI's revenue in FY23 experienced a significant decline of 14.1% YoY, mainly attributed to decreased sales across all divisions within the group. The decrease can be attributed to the deceleration in shipments and a reduction in orders received. Correspondingly, the group's net profit also saw a decrease, amounting to RM21.9mn. 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).

RKI’s revenue is greatly influenced by US economic conditions

Based on our observations, it's clear that the RKI revenue is significantly responsive to shifts in US economic conditions (Chart 1). Note that, the US market accounted for approximately 90% of RKI's total revenue in FY23. Therefore, as we look ahead to FY24, we anticipate a reduced earnings contribution from RKI due to a less favourable global economic forecast. Additionally, we foresee an increase in out-of-home consumption, which could potentially lead to reduced demand from both existing domestic and international customers. Furthermore, note that the USD has appreciated by 5.7% against the Ringgit YTD. Consequently, we believe that the favourable foreign exchange rate (USD/MYR) could potentially balance out the decrease in sales encountered by the group in FY24

The decline in housing demand is expected to have a negative impact on RKI.

The decline in US Existing Home Sales is anticipated to have an adverse impact on the group’s furniture business (Chart 2). In July 2023, existinghome sales in the United States experienced a 2.2% decline compared to the previous month, reaching a seasonally adjusted annualized rate of 4.07mn units. This figure marks the lowest point since January and falls short of the market's expectation of 4.15mn units. The principal factors contributing to this decline are higher mortgage rates and constrained inventory. The reduction in existing-home sales in the US can also be attributed to inflationary pressures and an increase in cost environment. Despite the reopening of economic activities worldwide, the US has seen a decrease in housing demand since the beginning of this year. Hence, furniture export demand from US is expected to be on downward trend in the near term. Nonetheless, it's worth noting that the group has guided its intention to align its strategies for cost management, creating new products, and innovating designs in accordance with the current market in order to maintain its profitability.

Foresee lower demand in FY24

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 the current context of elevated costs, we recognize that viable alternatives are accessible, particularly second-hand furniture. This offers customers the choice to opt out of procuring RKI's furniture offerings. Verified Market Research has forecasted that the off-the-shelf second-hand furniture market is set to achieve a value of USD 27.2bn by 2027, exhibiting a CAGR of 10.2% from 2020 to 2027. The second-hand furniture market is experiencing rapid growth due to the expanding availability of second-hand furniture through both online and offline channels. 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.

Maintain our HOLD recommendation and unchanged TP of RM1.37

We maintain our HOLD recommendation and unchanged 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 -7.6% YoY, attributable to the challenging conditions within the global furniture sector.

Source: BIMB Securities Research - 1 Sept 2023