Lii Hen’s 1H21 core PATAMI of RM20.1m (YoY: -28.1%) was below our expectation. The results shortfall was due to higher than expected raw material cost. We lower our FY21/FY22/FY23 earnings forecasts by -30.9%/-6.1%/-8.9% accounting for the production capacity loss in 3Q21 as well as higher raw material cost assumptions. Maintain BUY with a higher TP of RM3.74 pegged to a lower PE multiple of 9x (from 10x) based on FY22 core EPS of 41.6 sen. We anticipate an earnings recovery once Lii Hen resumes operations supported by its backlog orders as well as strong demand for its products, especially from the US market.

Below expectation. Lii Hen’s 2Q21 core PATAMI of RM7.5m (QoQ: -41.0%, YoY: - 21.3%) brought 1H21’s sum to RM20.1m (YoY: -28.1%). The result was below our expectation, accounting for 42.8% of our full year forecast. The results shortfall was due to higher than expected raw material cost. 1H21 core PATAMI was arrived after adjusting for foreign exchange gains (RM409k), gain on disposal of PPE (RM22k) and loss on derivative instruments (RM505k).

Dividend. None. (2Q20: 2.5sen). 1H21: 3 sen (1H20: 5 sen).

QoQ. Revenue declined by 22.3% mainly due to lower production volume as all 6 factories were shut down for 4 weeks due to FMCO (vs 4 factories were shut down for 4 weeks in the previous quarter due to a Covid-19 outbreak in the factory in Jan). In turn, core PATAMI decreased by 41.1%.

YoY. Revenue increased by 30.5% as higher sales volume more than offset weaker USD during the quarter (2Q21: RM4.13/USD vs 2Q20: RM4.32/USD). Despite an increase in revenue, core PATAMI declined by 21.3% mainly due to higher raw material and labour costs. Gross profit margin deteriorated to 13.8% (vs 17.8% SPLY).

YTD. Revenue increased by 21.7% due mainly to an increase in sales volume. Despite the increase in revenue, core PATAMI decreased by -31.7% % mainly due to higher raw material and labour cost coupled with an increase in operating expenses. Gross profit margin deteriorated to 14.5% (vs 19.1% SPLY).

Outlook. We expect Phase 1 to have a bigger impact on the group’s earnings in 3Q21 due to the longer duration of shutdown (c.2.5 months) compared to 2Q21 (1 month). Nonetheless, we expect a strong rebound in sales once Lii Hen resumes operations supported by its backlog orders as well as strong demand for its products, especially from the US market.

Forecast. After accounting for the production capacity loss in 3Q21 as well as higher raw material cost assumptions, we lower our FY21/FY22/FY23 earnings forecasts by - 30.9%/-6.1%/-8.9%.

Maintain BUY, TP: RM3.74. We lower our PE multiple from 10x to 9x due to its weakening profit margin as a result of the current elevated raw material cost pressure. We also roll over our valuation base year from mid-FY22 to FY22 as we believe investors will start looking ahead in anticipation of an earnings recovery once Lii Hen resumes operations. All in, our TP rises from RM3.52 to RM3.74 based on FY22 core EPS of 41.6 sen. We expect a strong recovery from Lii Hen once it returns to operations. Besides, Lii Hen also has a healthy balance sheet (net cash of RM136.1m or NCPS of 58sen). The current strength in USD should also augur well for the company.

Source: Hong Leong Investment Bank Research - 30 Aug 2021