Results

• Within expectation. FY17 core net profit of RM77.7m (+2.7%) came in within expectation, accounting for 97% of our forecast.

Deviations

• Broadly in line

Dividend

• Declared special interim divided of 8sen per share (ex-date: 9 Mar 2018) bringing YTD DPS to 20sen, expecting another final dividend of 4sen. Full year DPS of 24sen translates to a dividend yield of 7.5%.

Highlights

• QoQ : Despite the stronger MYR against US$ (4Q17: RM4.15/US$; 3Q17: RM4.25/US$), 4Q17 revenue only dropped by 2.7% as there was an increase in sales volume during the quarter. Core net profit fell by 22.8% to RM15.4m mainly attributable to higher operating cost (higher sub contractor charges and staff annual bonus).

• YoY : 4Q17 revenue rose by 9.7% to RM184.9m, but core net profit declined by 24.5% as higher sales volume was weighed down by the stronger MYR against the US$ (4Q17: RM4.15/US$; 4Q16: RM4.32/US$).

• YTD : FY17 core earnings rose 2.7% to RM77.7m, due to the increased sales volume in existing and new products (upholstery sofa).

• While labour shortage and rising raw material will remain an issue to manufacturing players including Lii Hen, we are confident that Lii Hen would be able to pull through with management’s relentless efforts in adopting effective cost management.

• Outlook: We remain positive on Lii Hen’s earnings outlook, as the group continuously focuses on i) diversifying its product range to strengthen its market position, ii) adopting effective cost management and iii) looking for automation opportunities for its production lines.

Risks

• (1) Escalating raw material price (2) High dependency on foreign workers; and (3) Stronger-than-expected MYR (against the US$).

Forecasts

• We cut our FY18-FY19 net profit by 2.2% to RM75.2m and RM76.3m respectively to account for a higher operating cost.

Rating

BUY ( ↔ )

• We continue to like Lii Hen due to its strong balance sheet (net cash per share 29.6 sen as at 31 Dec 17), generous dividend payout (dividend yield of 7.5%) and ongoing efforts 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 a lower TP of RM4.18 based on 10x FY18 EPS of 41.8sen.

Source: Hong Leong Investment Bank Research - 23 Feb 2018