Lii Hen’s 4Q20 core PATAMI of RM77.9m (QoQ: -6.4%, YoY: +24.5%) came in within our expectation, accounting for 105% of our full-year forecast. After accounting for a higher cost structure and weaker USD against MYR, we lower our FY21/22 earnings forecasts by 15.7%/4.1%. Our TP decreases from RM4.96 to RM4.18 pegged to an unchanged PE multiple of 10.5x of FY21 earnings. While higher production cost and weaker USD are near term headwinds, this is balanced by its healthy balance sheet (net cash of RM133.1m or 74sen per share) and dividend yield of 5.1%. Downgrade from Buy to HOLD.

In line. Lii Hen’s FY20 core net profit of RM77.9m (-20.7%YoY) came in within our expectation, accounting for 105% of our full-year forecast. Core net profit was arrived after adjusting for foreign exchange losses, gain on disposal of PPE and gain on derivative instruments totalling a net sum of RM2.2m.

Dividend. Declared DPS of 4 sen, which will go ex on 8 Mar 2021 brought FY20 DPS to 14 sen (4Q19: 4.5 sen, FY19: 15.5 sen).

QoQ. Revenue decreased by 6.4% due to (i) shortage of containers, resulting in goods not being shipped to customers on time; and (ii) the average USD against MYR continued to depreciate (-2.3% QoQ). Core PATAMI on the other hand decreased by - 43.3% due to higher raw material and labour costs.

YoY. Revenue increased by 24.6% due to higher demand for the group’s products, especially for bedroom and sofa sets. Despite higher revenue, the group’s core PATAMI declined by -20.7% due to higher raw material and labour costs, which could not be passed on to the customers in the current quarter.

YTD. Despite about eight weeks of production disruptions due to MCO, Lii Hen managed to grow revenue by 11.3% to RM931.4m due to increase in sales in all of its products. Core PATAMI was down 5.1% due to higher production costs.

EMCO updates. Lii Hen was placed under EMCO on Dec 27 after seven of the group’s employees tested positive for Covid-19. On 15 Jan, the group resumed its operations in stages. Subsequently on 29 Jan, the EMCO was fully lifted by KKM and the group returned to full operations on 30 Jan. While the EMCO will impact the earnings of 1Q21, the group is expected to make up for the loss in capacity during the rest of the year by ramping up production.

Outlook. Lii Hen continues to see strong demand, especially from the US due mainly to the trade diversion from China to the SEA region. However, as the group is operating at near its full capacity, there may be limited upside to its sales. The increasing raw material cost coupled with a weaker USD will put a squeeze on the gross profit margin of the company. Lii Hen has started to adjust their prices upwards starting from Dec 2019 which will partially offset their higher cost structure.

Forecast. After accounting for the higher cost structure and weaker USD, we lower our FY21/22 earnings forecasts by 15.7%/4.1%.

Downgrade to HOLD, TP: RM4.18. Following the earnings cut, our TP decreases from RM4.96 to RM4.18 pegged to an unchanged PE multiple of 10.5x of FY21 earnings. While higher production cost and weaker USD are near term headwinds, this is balanced by its healthy balance sheet (net cash of RM133.1m or 74sen per share) and dividend yield of 5.1%. Downgrade from Buy to HOLD.

Source: Hong Leong Investment Bank Research - 19 Feb 2021