Investment Highlights

• We maintain our BUY call on Lee Swee Kiat Group (LSK) with an unchanged fair value (FV) of RM0.90/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.

• LSK’s 9MFY22 core net profit of RM8.7mil came in within expectations, accounting for 72% of our FY22F earnings and 69% of consensus. As a comparison, 9M accounted for 64%-81% for FY19-FY21 core net profit. Hence, we made no changes to FY22F- 24F earnings.

• No interim dividend has been declared in this quarter as LSK historically declare dividend post-4Q results. This remains in line with our FY22F DPS of 3.0 sen/share.

• On a YoY basis, LSK’s 3QFY22 core earnings soared 74% to RM1.9mil, in tandem with a 63.6% surge in revenue to RM31.7mil. The stronger core earnings were mainly driven by stronger domestic sales in wholesale and business-to-customer sales channels given constrained activities with enhanced movement control orders (EMCO) back in 3QFY21.

• Nevertheless, the export segment remained weak in 3QFY22 amid weakening global growth due to high inflation and tightening monetary climate. Consequently, the utilisation rate of the 2 latex foam plants decreased to 50% (vs 77.5%-79% in FY19-21). Going forward, LSK guided that export demand has stabilised in 4QFY22F.

• On a QoQ basis, LSK’s 3QFY22 core earnings fell 40%, despite flattish revenue and declining average latex prices. This was mainly due to lower core profit margin (-4.0ppt QoQ), dampened by aggressive promotional expenses in the domestic market during the quarter. LSK guided that promotional activities were successful and are likely to support domestic sales in 4QFY22F.

• LSK recorded total sales of 10-11k A-series mattresses in 10MFY22, which was 43%-57% higher than 7k achieved in FY21 and accounting for 78% of management’s revised FY22F target of 12-15k.

• LSK guided that margin expansion from the declining average latex price trend will only happen in 4QFY22F. As natural latex price decreased by 16.9% QoQ in 3QFY22 and stabilised until Oct 2022, we estimate this could expand LSK’s net profit margin by an estimated 2.5-3.0%-point in 4QFY22F from 10% in 2QFY22.

• The stock currently trades at a compelling FY23F PE of 8.0x, which is an unjustified 31.6% discount to its 5-year median of 11.7x while offering a decent dividend yield of 4.9%, underpinned by a net cash position of RM9.1mil (9% of market cap).

Source: AmInvest Research - 22 Nov 2022