Investment Highlights

• We initiate coverage on Lee Swee Kiat Group (LSK) with a BUY recommendation at a fair value of RM1.00/share, based on an FY23F target PE of 11.7x, at parity to its 5-year median. There is no ESG-related adjustment based on our 3-star rating.

• Incorporated in 1975 as a furniture wholesaler, LSK evolved into the largest natural latex bedding manufacturer in Malaysia.

• The group has 2 manufacturing facilities with a total annual capacity of 7,000 MT latex foam, located in Klang, Selangor, which has been running at a utilisation rate of 78–79% over the past 3 years. LSK currently commands a 10% market share in Malaysia’s total mattress sales.

• With >45 years of experience in the industry, LSK has established reputable brand names such as Napure and Englander with a reasonable pricing structure without compromising on quality.
• Hence, LSK was able to increase its market share amongst the top 3 local latex mattress manufacturers from 49% in 2018 to 59% in 2021. With a distinct reputation, LSK has been able to pass on higher raw material costs (i.e. natural latex) to its customers though with a 1–2 months’ lag.
• Additionally, the group is well-supported by a strong and diversified network of customers. This increases LSK’s business resilience and positions the group to tap on to the growing domestic and global demand for mattresses.

• We believe LSK is a proxy to several long-term positive structural trends: (a) increasing consumer preference for latex mattresses; (b) post-pandemic health awareness; (c) increasing affluence; and (d) rising ageing Malaysian population.

• However, we expect some near-term hiccups to LSK earnings growth in FY23F due to stubbornly high inflation, monetary tightening that could lead to a bumpy economic outlook in both domestic and global fronts.

• Nevertheless, we project the group’s earnings to improve with a CAGR of 24.6% in FY21–24F, which is premised on a revenue CAGR of 23.2%, driven by Cuckoo collaboration and expanding market share in domestic market.

• LSK is a net cash company with a strong cash position of RM11.7mil as at 30 June 2022, which translates to 10% of its market cap or 7 sen/share.

• The stock currently trades at a compelling FY23F PE of 8.3x at an unjustified 30% discount to its 5-year median PE of 11.7x while offering a decent dividend yield of 4.3%.

Source: AmInvest Research - 15 Sept 2022