• A fire broke out in Lii Hen’s second premises of Favourite Design Sdn. Bhd. ("FDSB"), a major wholly-owned subsidiary of the Company in Kawasan Perindustrian Bukit Pasir, 84300 Bukit Pasir, Muar, Johor Darul Takzim. The premises housed 8 blocks of single storey furniture factory building together with a three-storey office block.
• The incident has caused 4 out of 8 blocks of production lines, the conveyor system, spraying and wood making machines as well as inventories (mainly of white parts) destroyed by the fire.
• The full financial and operational impact of the incident is yet to be ascertained. However, management guided that losses could be fully covered by insurance coverage.
• These 4 lines are the old lines that are catered mainly for small quantity orders. The mass quantity orders are being run on the new lines. Hence, the impact on production would be minimal as Lii Hen has more than 10 spraying belts.
• According to the management, the fire would affect 5-10% of its November’s total production and the management is confident that full operations would be able to resume within one month.
• At the meantime, Lii Hen would increase its production hours/shifts at the main premises to compensate for the loss in capacity.
• Recall in 2014, a similar fire incident happened in Lii Hen’s main factory and operation was resumed back to normal within 3 days, by renting new premises and outsourcing to more sub-contractors. Hence, we opine that Lii Hen would be able to manage this fire incident with minimal struggle.

Risks

(1) Escalating raw material price

(2) High dependency on foreign workers; and

(3) Fluctuation on foreign currency (US$).

Forecasts

• We cut our FY17 net profit by 5.1% to account for a 2.0% lower production volume assumption. Maintain our FY18-19 earnings forecast.

Rating BUY (↔)

• We still like Lii Hen due to its strong balance sheet (net cash per share 53.8 sen as at 30 June 17), high dividend payout (dividend yield of 6.4%) and its ongoing effort to adopt effective cost management. Moreover, we expect stable growth in the global furniture market due to growing real estate industry and increasing number of global retail stores.

Valuation

• Reiterate BUY with an unchanged TP of RM5.04 based on 11x CY18 EPS of 45.8sen.

Source: Hong Leong Investment Bank Research - 30 Oct 2017