Lii Hen’s 9M18 core earnings of RM36.3m (-47.7%YoY) accounted for 63% of our full year forecast. We deem the results inline as we are expecting a stronger 4Q on the back of the favourable USD environment. 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 lower cost environment, we opine that it margin will improve. A DPS of 3.5sen was declared. We maintain our earnings forecasts and a BUY rating with a higher TP of RM3.66 as we pegged to a higher PE multiple to 11x of FY19 EPS.

In line. Lii Hen’s 9M18 core earnings of RM36.3m (-47.7%YoY) came in within our expectation, accounting for 63% of our full-year forecast. We deemed the results within expectation as we expect 4Q to come in stronger on the back favourable USD environment, which currently is trading at RM4.15/USD (vs. RM4.08/USD in 3Q18).

Dividend. Declared 3rd interim DPS of 3.5 sen (ex-date: 10 Dec 2018). For full year, we are projecting a total DPS of 18sen, translating to a dividend yield of 5.5%.

QoQ. Revenue only increased marginally by 1% from USD46.5m to USD47m, however thanks to the stronger USD against MYR (2Q18: RM3.94/USD vs 3Q18: RM4.08/USD), sales in terms of ringgit improved by 5.2% to RM200.2m. Core earnings ballooned by 51.9% to RM15.8m supported by an improved margin of 2.4%- pts. The improved margin was due to (1) higher ringgit sales and (2) lower cost of production (lower particleboard and MDF prices).

YoY. Revenue grew strongly by 12% to USD47m in 3Q18 (from USD42m in 3Q17), however this only translated to a 5.4% revenue growth in terms of ringgit as it was offset by the stronger MYR against USD (3Q17: RM4.25/USD vs 3Q18: RM4.08/USD). Despite the higher revenue, earnings declined by 20.8% due to higher operating cost, mainly from the newly implemented foreign labour levy (effective Jan- 18).

YTD: 9M18 revenue rose by 9.7% to RM584.4m, supported by higher demand from Africa, America, Asia, Australia, and Europe. However, core net profit declined by 41.6% to RM36.3m, mainly attributed to higher operating cost, chiefly from the implemented foreign labour levy (effective Jan-18).

Outlook. Moving forward, we opine that Lii Hen will benefit from (1) declining oil and engineered wood selling prices (lower cost of production), (2) stronger USD against MYR and (3) stronger demand from US (result of US-China trade war). We also think that the group will be less affected by the labour levy in FY19 as they had the year to adapt to and adjust their ASP.

Forecast. Maintain as the results were inline.

We maintain BUY, with higher TP of RM3.66 (previously RM3.33). While there are no changes to our earnings forecast, we ascribe a higher PE multiple of 11x (previously 10x) to reflect the heightened interest in export plays stemming from the recent USD strength and potential gain from US-China trade war. Consequently, our TP is raised to RM3.66 from RM3.33 pegged to 11x of FY19 EPS of 33.3 sen. We continue to like Lii Hen for its strong balance sheet (net cash per share 21.1 sen as at 3Q18), generous dividend payout (yield of 5.5%) and ongoing efforts to adopt effective cost management.

Source: Hong Leong Investment Bank Research - 23 Nov 2018