KEY INVESTMENT HIGHLIGHTS

• Below expectation amidst seasonal low demand
• Turnaround in US demand outlook
• Earnings forecast; Maintained
• Maintain BUY with an unchanged TP of RM1.60

Below expectation. Rhong Khen International reported a FY24 core PATANCI of RM11.7m, after excluding a one-off item of RM4.3m. The core earnings came in below our expectation, accounting for only 91% of our full-year estimate, as 4Q performance experienced higher tax provision. Meanwhile, the earnings fell short of the streets' full-year FY24 estimate at 72%. No dividend was declared during the quarter.

Seasonally low quarter. Sequentially, RKI's revenue improved to RM130.1m in 4QFY24 from RM114.8m in 3QFY24, improved in sales by a furniture plant in Vietnam due to higher shipment and higher sales recorded by sawmill plants due to higher demand. PBT Level jumped by >100%qoq to RM2.6m in line with the increase in gross profit offset with higher foreign exchange losses recorded.

FY24 performance. On a yearly basis, the group's topline fell by - 19.7%yoy to RM521.6m mainly due to lower sales recorded by all divisions of the Group as demand from main export market i.e United States remained sluggish offset with strengthening of US Dollar against Ringgit Malaysia by +4.5%. Consequently, PBT was weaker by - 28.7%yoy inline with the decrease in gross profit offset by higher other income and lower finance costs.

Earnings forecast. Maintained as we anticipate stronger US demand driven by i) the worst of the downturn is over, ii) potential replenishment of furniture stocks as US importers/ wholesalers/ retailers have cleared their warehouse inventories, and iii) a cutting interest rate environment that could boost the furniture demand.

Recommendation. Maintain BUY with an unchanged TP of RM1.60.

Our TP is derived from FY25F's BVPS of RM3.63, pegged to 5Y historical +0.5SD P/BV of 0.44x. Looking ahead, we are optimistic about RKI's FY25 outlook underpinned by: (1) better consumer sentiment and demand for furniture ahead thanks to a lower base and better interest rate environment, (2) resolution of the over-inventory issue in the US, and (3) being a beneficiary of the consistently high USD/MYR exchange rate, given that export sales contributed almost 90% of the total revenue.

Besides, balance sheet of RKI is healthy with strong net cash position, which could provide protection against any potential downside risks.

Source: MIDF Research - 28 Aug 2024