Lii Hen Industries Berhad

Business 

Lii Hen Industries berhad is involved in the business of manufacturing furnitures. This is considered a old school business. Plain and simple and nothing fancy. 

Growth

Revenue has grown from RM 316m to RM 623m from the year 2013 to 2016. This represents a whopping 93% in a 3 year period or a compounded growth of around 25%. 

Likewise, gross profit net profit has increased from RM 48m to RM 145m & RM 17m to RM 73m. This represents compounded growth of 45% and 63%

The growth can be said as a healthy one as the improvement of profit is greater than revenue, signifying that the Company has achieved better margins from year to year.

As seen from the annual report for the year 2016, the management acknowledges that the risk faced by the Company is mainly coming from the rising labour cost and management has placed effort to place more reliance on automation in the future.

Profit may be an accounting number and can only be considered healthy if it is supported by real cash inflow. For similar period, both operating cash flow as well as free cash flow remains in the positive region and has been growing consistently. Cash pile has also increased from RM 54m to RM 134m. 

This implies that growth has been healthy and well supported by real hard cash and Lii Hen is a cash generating machine.

Efficiency

A company acts as a medium for investor to grow their money. Hence, to determine whether the company has put capital provider's money into good use, it make sense to look at the return on equity of the company. Common business sense tells us that if we were to put our hard earned money into a business, by logic we are expecting a return higher than risk free instruments (ie. Bank FD/Government bond), which currently stands at around 3-4%. Hence, if a company which we invest fails to yield that kind of return over the capital, we are better off putting our money into the banks, as the management is not utilising our money efficiently. These are value destroying companies.

Having a look at Lii Hen's ROE, is it currently giving a return of 28% and has since grown from 12% from year 2013. This is very impressive and is definitely way above the required return by an investor. At the same time, we do not want the ROE to be distorted by companies which borrow too much money to generate income. Nevertheless, the gearing of Lii Hen remains in the region of 0.1x and can be considered low, telling us that ROE is not distorted by the effect of debt financing. 

Looking at the figures, this is a real good company, a worth while investment if the price is reasonable.

Valuation

This lead to us looking into valuation of the company. As of today, the price closed at RM 3.22, which has remained constant as compared to a year ago. 

At current price, P/E ratio stands at 8 times, which is not expensive. Better still, enterprise value/EBIT stands at 5 times, which represents earnings yield of around 20%. Looking at a logic angle, the business is going to give back your capital in 5 years time, given all factors being constant. This can definitely be considered cheap for a company which has been generated good returns and growth over the years.

A rough estimation of the fair value, assuming a PE ratio of 10 times, would yield of price of RM 4++, a good MOS in the region of around 30%, and this is given the fact that there is no growth.

Additional

Furniture stocks have generally retraced from their highs during the Hoo-Haa period when USD has Strenthen against the RM. Nevertheless, I believe that the exchange rate is not something that we can predict and our primary focus should be on how the business of the company is doing. Despite the recent strength of RM against USD, the Q1 result of Lii hen has remained impressive and has grown as compared to similar period in 2016. 

More importantly, Lii Hen has been generous in dividend payout and at current price is giving a dividend yield of 8%. We may need to consider dividend yield carefully and whether the company is able to maintain its current payout. Looking at the fact, Lii Hen will definitely be able to to pay similar or ever better dividends in the future, given its continuous profit and cash growth. I belive the high dividend yield will provide extra cushion over the risk of investing in Lii Hen.

I belive the reason the share price has remained surpressed is mainly because Mr K has been disposing like no tomorrow. Nevertheless, he has ceased to become substantial shareholder and I think its time for Lii Hen's share to change hand from him to us. Maybe an extra consideration to buy is that Lii Hen's trading volume for today has achieved 3.7m shares and is the highest in the past 1 year. However, that is just an extra point to look at.

Personally, I see the risk of investment in great company at great price like Lii Hen as quite low. Nevertheless, there is myth that the 10 year stock market crash cycle is going to happen within this year or either next. To me, that is out of my control and I believe great company like Lii Hen can definitely strive through the next recession.