• Maintain HOLD (TP: RM1.37). Rhong Khen International (RKI) witnessed a significant downturn of -34.2% YoY in its revenue during the 6MFY24, attributed to diminished sales across all sectors stemming from prolonged weaker demand in its primary market, the United States. Concurrently, the company reported a reduced net profit of RM13.4mn. However, factoring in exceptional items such as foreign currency translation, totalling RM5.2mn, the company revealed core earnings of RM8.2mn, marking a notable decrease of - 59.4% YoY. RKI's bottom-line performance met our expectations but surpassed consensus estimates, representing 45.8% and 72.1% of the forecast for FY24, respectively. Looking ahead, we foresee RKI facing challenges in achieving robust profitability in FY24 due to weakened demand in export markets, a trend exacerbated by current inflationary pressures and concerns regarding a potential recession. 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 2Q24, RKI top-line grew by +29.4.9% QoQ to RM156.1mn on the back of (i) the rise in sales this quarter at the furniture plant in Vietnam, primarily due to increased shipments, (ii) heightened sales at sawmill plants and the panel board lamination plant in the current quarter, driven by elevated demand from both local and export markets, and (iii) a 0.8% strengthening of the USD against the MYR.

• Forecast. No changes to our forecast.

• Outlook. In the immediate future, we anticipate a decline in furniture demand. This trend is primarily driven by the growing preference for second-hand furniture and the challenges faced by US homebuyers in an increasingly unaffordable housing market, influenced by the Federal Reserve's interest rate hikes. Additionally, heightened inflationary pressures pose a further threat to RKI's earnings, as consumers are likely to reduce discretionary spending.

Source: BIMB Securities Research - 22 Feb 2024