Lii Hen’s 1Q18 core earnings of RM11.6m (-24.5%QoQ, -49.7%YoY) came in below our expectation, accounting for 20% of our full year forecast. The group posted higher sales volume but was weighed down by i) higher raw material cost, ii) higher labour cost, iii) stronger ringgit. Moving forward, under the higher cost environment, we opine that it may be a tough year ahead. A lower DPS of 2.5sen was declared as compared to 1Q17:4sen. We cut our FY18-20 earnings by 18-22% mainly to account for higher raw material cost. We downgrade to HOLD from BUY with a lower TP: RM2.62 (previously: RM3.25).

Below expectation. Lii Hen’s 1Q18 core earnings of RM11.6m (-24.5%QoQ, -49.7% YoY) came in below our expectation, accounting for 20% of our full year forecast.

Deviations. Higher-than-expected cost of raw material.

Dividend. Declared first interim DPS of 2.5sen (ex-date: 11 Jun 2018) vs 1Q17: 4 sen.

QoQ. Despite the stronger MYR against US$ (1Q18: RM3.90/US$; 4Q18: RM4.15/US$), 1Q18 revenue increased by 5% as lower ASP (in MYR terms) was more than offset by higher sales volumes. Core net profit, on the other hand, fell by 24.5% to RM11.6m mainly attributable to higher raw material costs (which include, amongst others, coating spray and plastic packaging), and higher labour cost (arising from foreign labour levy).

YoY. 1Q18 revenue rose 12% to RM193.8m, but core net profit declined by 49.7% to RM11.6m as higher sales volume was weighed down by the stronger MYR against the US$ (1Q18: RM3.90/US$; 1Q17: RM4.44/US$, which in turn translated to lower sales proceeds). The group’s PBT margin declined by 11%-pts to 16.7% as it was affected by i) higher raw material cost and ii) foreign labour levy.

Outlook. Apart from wood costs (which accounts for 32% of total production cost, based on our estimates), Lii Hen’s other cost components, which include plastic packaging and coating spray, and labour costs (which account for 11% and 19% of total production costs) were also on the rise. We are expecting plastic and spray prices stay high given their positive correlation to crude oil price. Hence, we opine that given the higher cost environment it may be a tough year ahead for Lii Hen.

Forecast. We cut our FY18-20 earnings forecast by 18-22% mainly to account for higher raw material cost. Post earnings revision, we cut our DPS assumption to 15sen (based on dividend payout assumption of 59%) from 18sen and this translates to a dividend yield of 5.7%. Post earnings forecast adjustment, we downgrade to our call to HOLD from BUY, with a lower TP of RM2.62 (previously: RM3.25) based on a 10x revised FY19 EPS of 26.2 sen.

Source: Hong Leong Investment Bank Research - 25 May 2018