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Tuesday, September 19, 2017

Lii Hen Industries - Solid as Rock

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Highlights

  • Lii Hen Industries Bhd is involved in the manufacture and marketing of wood-based furniture (which include bedroom sets, upholsteries, dining sets, and panel sets).
  • Malaysia’s furniture exports to grow further. China (the world’s largest furniture exporter) reported its first decline in furniture exports in 2016 due to shortage of raw materials (in particularly wood). We believe the decline in furniture supply from China will benefit other major furniture exporters including Malaysia.
  • Diversifying away from wood based furniture. Last year, Lii Hen further expanded its product range by diversifying into the manufacture and design of upholstery sofa sets moving away from its bread and butter.
  • Potential surge in furniture demand on hurricane reconstruction . Reconstruction activities in the US from hurricane damages may help boost Lii Hen’s furniture exports as the group ships 77% of its total exports to the US. We note that Malaysia’s wooden furniture exports surged by 25% a few months after Hurricane Katrina in 2005.
     
  • Financially stronger than its peers. The Group’s core net profit grew at a 5-year CAGR of 22.6%. Lii Hen has a strong track record in terms of profitability, ROE and dividend payout as compared to its closest peers, due to its concentration in operational efficiencies and innovating into higher margin products via differentiations.
     
  • Strong balance sheet. Lii Hen is currently sitting on a large pile of cash (net cash per share of 53.8 sen). Given its bright earnings prospects, we expect Lii Hen to continue paying generous dividend of 26 sen/share (dividend yield of c.7.9%).

Risks

  • 1) Escalating raw material price; 2) High dependency on foreign workers ; and 3) Fluctuation on foreign currency (US$).

Forecasts

  • We project FY17-19 net profit to increase by 3%-11% to RM80.1m, RM82.5m and RM84.4m respectively, largely to account for new production line starting to pay off and continuous growth in the US market demand.

Rating

BUY (New)

  • We like Lii Hen due to its strong balance sheet (net cash per share 53.8 sen as at 30 June 17), high dividend payout (dividend yield of 7.9%) and its ongoing effort to adopt effective cost management. Moreover, we expect stable growth in the global furniture market due to growing real estate industry and increasing number of global retail stores.

Valuation

  • We initiate coverage on Lii Hen with a BUY recommendation with TP of RM5.04 based on 11x FY18 core EPS of 45.9sen.
Source: Hong Leong Investment Bank Research - 19 Sept 2017

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