Investment Highlights

• We maintain our BUY call on Lee Swee Kiat Group (LSK) with a higher fair value (FV) of RM1.02/share (from RM0.90/share previously), 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 FY22 core net profit of RM13.8mil beat expectations, coming in 14% above our estimate and 12% above street’s. The deviation from our estimation was mainly attributable to betterthan-expected domestic sales.

• Hence, we increased net profit forecasts by 14% for FY23F and 2% for FY24F mainly from stronger domestic sales assumptions supported by an improving unemployment rate (Exhibit 2) and relatively faster wage growth vs. inflation rate (Exhibit 3).

• In addition, we introduce FY25F earnings with a 15% YoY growth, driven by favourable domestic mattress demand and sales of Aseries mattresses in collaboration with Korean-based Cuckoo International (Malaysia) (Cuckoo).

• The only FY22 dividend of 3.5 sen/share has been declared in 4QFY22 (implying a payout of 41%), which beat our forecast of 3.0 sen/share.

• On a YoY basis, LSK’s 4QFY22 core earnings increased 19% to RM3.8mil, in tandem with an 8% growth in revenue to RM35.4mil. The higher core earnings were mainly driven by increased mattress sale volume domestically in 4QFY22.

• Nevertheless, the export segment remained sluggish in 4QFY22 amid weakening global growth due to high inflation and tightening monetary climate. Consequently, the utilisation rate of the 2 latex foam plants was 50% (vs 77.5%-79% in FY19-21). Furthermore, LSK guided there is no sign of demand pickup since the beginning of this year so far.

• Notably, LSK recorded total sales of 12k A-series mattresses in FY22, which was 71% higher than 7k achieved in FY21. To recap, LSK entered into a collaboration with Cuckoo to launch the Aseries mattress in Dec 2020 and began selling in Mar 2021.

• On a QoQ basis, LSK’s 4QFY22 core earnings doubled to RM3.8mil in tandem with a 12% growth in revenue. This was mostly due to higher domestic sales of mattresses during the quarter. Furthermore, LSK’s 4QFY22 core profit margin has expanded to 15% (from 6% in 3QFY22) due to lower latex price (- 7% QoQ) and additional hedging costs incurred in 3QFY22.

• Besides, average latex price increased 9% to RM 5.14/kg currently from RM4.70/kg in 4QFY22 (Exhibit 4). We deem this spike still within our assumption of RM5.50/kg in FY23F.

• Based on our regression model, we estimate that the recent 9% increase in average natural latex price will cause a 0.5%-1.5%-point reduction in LSK’s net profit margin in 1QFY23F, assuming no hedging arrangement.

• We continue to favour LSK for (a) being the largest natural latex mattress manufacturer in Malaysia, (b) its expanding market share of natural latex mattress vs. domestic peers (Exhibit 5), and (c) its collaboration in marketing the A-series mattress through rental-based business model under Cuckoo’s platform.

• The stock currently trades at a compelling FY23F PE of 9.5x – 19% discount to its 5-year median of 11.7x while offering a decent dividend yield of 4.2%. Also, LSK has a healthy net cash position of RM11mil (8% of market cap).

Source: AmInvest Research - 22 Feb 2023