Lii Hen’s 1H18 core earnings of RM22.1m (-47.7%YoY) came in within our expectation, accounting for 48% of our full year forecast. The group posted higher sales volume but was weighed down by (i) higher labour cost (newly implemented foreign labour levy) and, (ii) stronger ringgit. Moving forward, under the higher cost environment, we opine that it may be a tough year ahead. A lower DPS of 3.5sen was declared as compared to 2Q17: 4sen. We maintain our earnings forecast. We maintain HOLD with an unchanged TP of RM2.62.

Within expectation. Lii Hen’s 1H18 core earnings of RM22.1m (-47.7%YoY) came in within our expectation, accounting for 48% of our full year forecast.

Dividend. Declared second interim DPS of 3.5 sen (ex-date: 6 Sept 2018) vs 2Q17: 4 sen. For full year, we are projecting a total DPS of 15sen, translating to a dividend yield of 5.2%.

QoQ. Revenue remained rather flat at about RM190.4m (-1.7%). However, 2Q18 core net profit decreased by 10.5% to RM10.4m from RM11.6m in 1Q18 with margin decreasing slightly by 0.6ppt.

YoY. USD sales volume grew by 27% from USD37m in 2Q17 to USD47m in 2Q18. However this only translated to a 12% revenue growth as it was offset by the stronger MYR against USD (2Q18: RM4.03/US$; 2Q17: RM4.29/US$). Despite the higher revenue, earnings declined by 45.7% due to higher operating cost, mainly from the newly implemented foreign labour levy.

YTD: 1H18 revenue rose by 12.1% to RM384.2m, supported by higher demand from Africa, America, Asia, Australia, and Europe. However, core net profit declined by 47.7% to RM22.1m, mainly attributed to higher operating cost, chiefly from the newly implemented foreign labour levy.

Outlook. We expect wood prices to stay high and wood accounts for 32% of total production cost. 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) are also higher as compared to last year. We expect plastic and spray prices to 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. Maintain as the results were inline. We maintain HOLD, with unchanged TP of RM2.62 based on a 10x FY19 EPS of 26.2 sen.

Source: Hong Leong Investment Bank Research - 24 Aug 2018