Lii Hen’s 1H22 core PATAMI of RM32.3m (+60.7%) came in below our expectation, accounting for only 38.8% of our full year estimate. The results shortfall was due to lower than expected revenue as customers continued to defer shipment of goods. Given the results shortfall, we lower our FY22/23/24 earnings forecasts by -18.8%/-12%/-8.7%. Maintain BUY but with a lower TP of RM1.18 (from RM1.31) based on 8.5x FY23 EPS of 13.9 sen following the earnings cut. We believe that (i) the continued strength of the USD; (ii) the group’s diverse customer base; and (iii) the gradual easing of global supply chain pressures will enable Lii Hen to weather through near term headwinds. Besides, Lii Hen also has a decent projected FY22 dividend yield of 6.4%.

Below expectations. Lii Hen’s 2Q22 core PATAMI of RM14.2m (QoQ: -21.5%, YoY: +89.3%) brought 1H22’s sum to RM32.3m (YoY: +60.7%). The result came in below our expectation, accounting for only 38.8% of our full year estimate. The results shortfall was due to lower-than-expected revenue (arising from protracted supply chain issues). 1H22 core PATAMI was arrived after adjusting for EIs totalling a net sum of RM4.5m (forex, disposal gains and derivatives).

Dividend. 1.17 sen with ex-date on 13 Sep 2022 (2Q21: None). 1H22: 5.17 sen (1H21: 3 sen).

QoQ. Revenue declined by 22.7% mainly due to lower sales volume across the group’s products. However, core PATAMI decreased by a smaller margin of 21.5% due to lower cost of sales.

YoY. Despite the restoration in plant operations (recall, there was a one-month production shutdown in 2Q21 due to MCO3.0), revenue was flattish (+1.4%), due to supply chain disruptions which resulted in customers deferring shipments as a result of exorbitant shipping charges and high stock-holding in customers’ warehouses . Nonetheless, core PATAMI increased by a much larger quantum of 89.3% due to the stronger USD vs. SPLY as well as lower cost of sales (GP margin 2Q22: 19.6% vs. 2Q21: 13.8%).

YTD. Revenue was flattish (+1.7%) from the reasons mentioned in the YoY paragraph above. Nonetheless, core PATAMI increased by 60.7% due to the same factors as mentioned above (GP margin 1H22: 18.4% vs. 1H21: 14.5%).

Outlook. We anticipate weaker furniture demand in the coming quarters due to reduced consumer spending and lower housing sales following rising inflationary pressures as well as recession fears. Nonetheless, we believe that the current strength in the USD (2Q22: RM4.35/USD vs. 3QTD: RM4.45/USD) would continue to sustain Lii Hen’s subsequent quarters as >90% of the group’s revenue comes from its exports. In addition, the group will also benefit from higher interest income on its net cash position of RM144.5m in view of subsequent rate hikes in the following months.

Forecast. Given the results shortfall, we lower our FY22/23/24 earnings forecasts by -18.8%/-12%/-8.7%.

Maintain BUY, TP: RM1.18 (from RM1.31). Following the earnings cut, our TP is lowered from RM1.31 to RM1.18 as we rollover our valuation year to FY23 from FY22 based on an unchanged 8.5x P/E multiple. We believe that (i) the continued strength of the USD; (ii) the group’s diverse customer base; and (iii) the gradual easing of global supply chain pressures will enable Lii Hen to weather through near term headwinds. Besides, Lii Hen also has a decent projected FY22 dividend yield of 6.4%.

Source: Hong Leong Investment Bank Research - 26 Aug 2022