Lii Hen’s 1Q21 core net profit of RM12.7m (QoQ: -30%, YoY: -31.6%) accounted for 17.7% of our full year estimate. The results shortfall was mainly due to higher than-expected raw material costs. After accounting for higher raw material costs and post annual report adjustments, our FY21/22 earnings forecasts fall by - 11.4%/-2.0%. We maintain HOLD with a lower TP of RM3.52 (from RM4.18) based on 10x revised FY21 EPS of 35.2 sen following the earnings adjustment. We remain cautious on the outlook of the company due to the elevated raw material costs as well as the heightened risk of Covid-19 outbreak in the factories. Nonetheless, the downside support for the share price would come from its NCPS of 58 sen and its decent dividend yield of 5.9%.

Below our expectation. Lii Hen’s 1Q21 core net profit of RM12.7m (QoQ: -30%, YoY: -31.6%) missed our expectation, accounting for only 17.7% of our full year estimate. The results shortfall was mainly due to higher-than-expected raw material costs. Core net profit was arrived after adjusting for foreign exchange gains, gain on disposal of PPE, and loss on derivative instruments totalling a net sum of RM0.4m.

Dividend. 3 sen (ex-date: 29 Jun 2021). (1Q20: 2.5 sen)

QoQ. Revenue fell -16.1%, due to lower sales volume from: (i) shutdown of the factory for close to 4 weeks due to the outbreak of Covid-19 cases in the factories; and (ii) delay in shipment of goods due to shortage of containers. Consequently, core PATAMI fell by -30%.

YoY. Revenue increased 15.7% due to higher sales volume (particularly for its bedroom and sofa sets). Despite the increase in revenue, core PATAMI decreased by -31.6% due to higher raw material and labour costs.

Outlook. Provided there are no further production disruptions, we expect Lii Hen’s earnings to improve in subsequent quarters, supported by the strong demand for its products, especially from the US market. In addition, the delay in shipment of products in 1Q21 due to the shortage of containers will also result in higher revenue recognized in 2Q21 as the products are shipped during Q2.

Forecast. After accounting for higher raw material costs and post annual report adjustments, our FY21/22 earnings forecast falls by -11.4%/-2.0%. We introduce FY23 forecasts.

Maintain HOLD, TP: RM3.52. Following the downward earnings revision, our TP lowers to RM3.52 (from RM4.18 earlier) based on 10x revised FY21 EPS of 35.2 sen. We remain cautious on the outlook of the company due to the elevated raw material costs as well as the heightened risk of Covid-19 outbreak in the factories. Nonetheless, the downside support for the share price would come from its NCPS of 58 sen and its decent dividend yield of 5.9%.

Source: Hong Leong Investment Bank Research - 3 Jun 2021