• Maintain HOLD (TP: RM1.37). Rhong Khen International (RKI) experienced a -45.5% YoY decline in its top-line during 3MFY24, influenced by reduced sales across all divisions due to prolonged weaker demand from its main market, the United States. Simultaneously, the group recorded a lower net profit of RM3.3mn. However, after accounting for exceptional items (foreign currency translation) amounting to RM1.9mn, the group reported core earnings of RM5.2mn (-12.9% YoY). RKI's bottom-line was in line with our expectations but above consensus, accounting for 29.2% and 51.4% of the FY24 forecast, respectively. Looking ahead, we anticipate RKI to register a subdued PATAMI in FY24 due to lower demand from the export market, aligning with current inflationary pressure and recession fears. We maintain a HOLD call with an unchanged TP of RM1.37, derived from a 5-year average historical forward PE ratio of 14.8x and a projected FY24F EPS of 9.2sen.

• Key highlights. In 1Q24, RKI top-line declined by -7.9% QoQ to RM120.7m on the back of (i) lower shipment recorded by a furniture plant in Vietnam, (ii) lower local sales recorded by a sawmill plant in Thailand and (iii) strengthening of USD against Ringgit by 2.9%. As a results, RKI’s recorded lower core net profit, plunged by -80.8% QoQ in 1QFY24.

• Forecast. No changes to our forecast.

• Outlook. We foresee continued growth in the demand for secondhand 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.

Source: BIMB Securities Research - 30 Nov 2023