• MYR1.25 FV based on 11x FY24F P/E. We like Lee Swee Kiat Group for its market-leading position in the latex bedding industry. It should benefit from the strong growth in demand for high-quality mattresses, stemming from an increase in the completion of domestic property projects and launches – and is targeting the local Malay and Chinese markets. The group has a healthy balance sheet, with net cash of 6 sen/share. Its FY23F dividend yield of c.4.9%, coupled with an ex-cash P/E of a mere c.6.5x, makes this counter a compelling investment.

• First and only aniline-free latex manufacturer. Besides being the largest natural latex bedding manufacturer in Malaysia, LSK was also recognised as the first and only aniline-free natural latex in the world by the Malaysia Book of Records in 2019. Commonly used to manufacture latex products, aniline is a dangerous toxin that, at its worst, is life-threatening. The group succeeded in using a food-grade gelling agent as a substitute to aniline to prevent potential health risks. The aniline-free mattresses offer quality and comfort of living. Hence, we see LSK’s commitment to ESG as its competitive advantage over regional peers.

• Targeting untapped customer pool. 80% of LSK’s customer pool before FY20 comprised Malaysian Chinese. In 2021, the group began collaborating with Cuckoo Malaysia (Cuckoo) for the rent-to-own model for customer affordability, and to tap into the vast local Malay market. The Cuckoo collaboration has been successful – sales grew from 7,000 units sold in FY21 to 12,000 units in FY22. Management recently engaged celebrity Diana Danielle as a brand ambassador (its second one, after model Amber Chia) to improve brand awareness among the Malay market. Going forward, LSK targets to sell 20,000 units in FY23. We expect a higher profit margin for Cuckoo sales, due to the accrual cost accounting standard where the cost of a product is only charged in the first year after its delivery.

• Buoyed by an active property market. Pent-up demand for new furniture – including mattresses – should be stronger, due to the higher completion rate for property projects post COVID-19. Malaysia’s property sales volume has been increasing after the economy reopened (Figure 5). As shown in Figure 4, there was a rise in the number of completed and new planned property projects YoY, in 2022. We also noticed a pick-up in the number of property project launches from developers, coupled with the easing overhang in supply (Figure 6). This bodes well for the furniture and fittings industries in the coming years.

• Undemanding valuation. Our fair value of MYR1.25 is based on an ascribed P/E of 11x on FY24F earnings. We believe this is fair – as it is at a discount to the 13.8x 2-year forward P/E of the KLCSU, and in line with the 12-month trailing P/E mean of its local peers (Figure 2). Key downside risks: Discontinuing its collaboration with Cuckoo, and a drop in demand overseas.

Source: RHB Research - 13 Jun 2023