Lii Hen’s 4Q22 core PATAMI of RM22.8m (QoQ: +47.1%; YoY: +88.4%) brought full year FY22’s sum to RM70.5m (+87.5% YoY). The results came in above expectations, accounting for 110% of our full-year forecast mainly due to margin expansion from the strengthening of the USD relative to the RM. However, despite the results beat, we remain cautious on the group’s FY23 outlook in view of elevated interest rates causing US housing to be increasingly unaffordable, thus negatively impacting furniture demand. Maintain HOLD with an unchanged TP of RM0.82 pegged to a PE multiple of 6.5x based on FY23 EPS of 12.6 sen.

Above expectation. Lii Hen’s 4Q22 core PATAMI of RM22.8m (QoQ: +47.1%; YoY: +88.4%) brought full year FY22’s sum to RM70.5m (+87.5% YoY). The results came in above our expectation, accounting for 110% of our full-year forecast mainly due to margin expansion from the strengthening of the USD relative to the ringgit. Core net profit for FY22 was arrived at after adjusting for EIs which consist of net foreign exchange gain as well as fair value gains on derivative financial instruments and biological asset amounting to RM4.3m.

Dividend. Fourth interim dividend: 1.1 sen and special dividend: 2 sen, both ex-date: 8 Mar 2023 (4Q21: 3.5 sen). FY22: 9.62 sen (FY21: 8 sen).

QoQ. Revenue increased marginally by 1.9% mainly due to increase in sales volume of panel products, which partially offset the lower sales volume in bedroom, dining and sofa sets. However, core PATAMI increased by a larger magnitude of 47.1% due to the strengthening of the USD vs preceding quarter.

YoY. Revenue decreased by -31.4% due to lower sales volume especially to the US. Efforts to build-up inventory by US customers to mitigate supply chain issues in FY21 resulted in high inventory levels at US warehouses. This together with an uncertain economic outlook were the main factors that caused the decline in sales volume for the current quarter. However, core PATAMI increased by 88.4% mainly due to relatively lower raw material costs as well as the stronger USD.

YTD. Revenue decreased by -2.5% due to the same reasons as mentioned in the YoY paragraph. However, core PATAMI increased by 87.5% due to the same reasons as mentioned above as well.

Outlook. Despite the results beat for the current quarter, we choose to remain cautious on the group’s FY23 outlook as long as rates in the US remain elevated, as it is causing mortgage payments to also be high, thus leading to decreased housing affordability. As US housing becomes increasingly unaffordable, fewer homes will be sold which negatively impacts furniture demand. This would affect Lii Hens’ earnings in subsequent quarters as the US is the group’s main export destination. Nonetheless, should the USD maintain its strength relative to the RM, this could help partially offset the decline in sales volume as seen in the current quarter.

Forecast. No change as we remain cautious on the group’s earnings outlook.

Maintain HOLD with an unchanged TP of RM0.82 pegged to a PE multiple of 6.5x based on FY23 EPS of 12.6 sen. Despite being a beneficiary of a stronger USD, demand uncertainty amidst an uncertain economic outlook is clouding the group’s earnings visibility. However, the group should benefit from higher interest income on its net cash position of RM186.4m (NCPS of 34.5 sen) in view of the current interest rate upcycle

Source: Hong Leong Investment Bank Research - 21 Feb 2023