Lii Hen’s 1Q19 core earnings of RM18.5m (-16.0% QoQ, +82.8%YoY) came in above our expectation, accounting for 31% of our full year forecast. Core earnings jumped 82.8% YoY on the back of stronger margins and favourable currency movement amidst higher sales volume. Moving forward, we opine that Lii Hen may be able to generate additional sales benefiting from escalation of the US-China trade war. A higher DPS of 3.5sen was declared as compared to 1Q18: 2.5sen. Post results, we raise our FY19-20 earnings by 27% on higher revenue and maintain our BUY call with a higher TP of RM4.22 (previously: RM3.66).

Above expectation. Lii Hen’s 1Q19 core earnings of RM18.6m (-15.8%QoQ, 83.2% YoY) came in above our expectation, accounting for 31% of our full year forecast. The upward surprise was due to higher-than-expected revenue.

Dividend. Declared first interim DPS of 3.5sen (ex-date: 12 Jun 2019) vs 1Q18: 2.5 sen.

QoQ. Revenue declined by 6.2% due to lower sales volume (-4.6% QoQ) and weaker USD (1Q19: RM4.09/USD; 4Q18: RM4.16/USD). Core net profit further fell by -15.8% to RM18.6m mainly attributable to increase in effective tax rate to 26% from 13% previously.

YoY. USD sales volume grew by 2% from USD47m to USD48m. 1Q19 revenue rose 4.9% to RM203.3m, and core net profit increased by 83.2% to RM18.6m thanks to the 4.3% appreciation of USD against RM (1Q19: RM4.09/USD; 1Q18: RM3.92/USD). The group’s PBT margin increased by 5.7%-pts to 11.4% which was contributed by (i) favourable USD exchange rate, (ii) decrease in sub-contractors charges and (iii) improved operational efficiency.

Outlook. Moving forward, we opine that Lii Hen may be able to generate additional sales benefiting from the unresolved US-China trade war. Many furniture manufacturing firms are moving out of China to Vietnam. With that the competition for raw material and labour in Vietnam will intensify, leaving Malaysia with a possible competitive edge in the global furniture market.

Forecast. We raise our FY19/FY20 net profit by 27%/26% respectively to account for higher revenue. We also take this opportunity to introduce our FY21 forecast of RM79.4m (+3.5% YoY).

Maintain BUY. Post earnings adjustment, we maintain our BUY call with higher TP of RM4.22 (from RM3.66) based on 10x FY19 PE. We reckon that export plays will remain in flavour given the current weak ringgit (strong USD) climate. Having said that, we continue to like the group’s healthy balance sheet as the group is currently sitting on a net cash per share position of 44.6sen (as of 31 Mar 2019).

Source: Hong Leong Investment Bank Research - 24 May 2019