Investment Highlights

• We maintain our BUY call on Lee Swee Kiat Group (LSK) with an unchanged fair value (FV) of RM1.02/share, based on an FY23F target PE of 11.7x, at parity to its 5-year median. There is no ESGrelated adjustment based on our 3-star rating.

• Our forecasts are maintained following an analyst briefing yesterday. These are the salient highlights:

• Since last year, LSK has been actively participating in international trade exhibitions to secure potential new customers for the group’s latex foam business as FY22 export demand contracted (-32% YoY).

• On a positive note, LSK entered into negotiations with 3 large potential customers from USA, South Korea and Australia. LSK guided that these negotiations could be concluded in 2Q/3Q2023.

• Hence, LSK expects latex plant utilisation rate (PU) to increase from 50% in FY22 to 70%-80% in 3Q/4Q2023. Nevertheless, we maintain our FY23F PU assumptions of 78%, pending further clarity on the new clients.

• On the domestic front, LSK stated that demand remains strong since the beginning of the year. We believe this stems from the reopening economy amid a declining unemployment rate (Exhibit 1) and relatively faster wage growth vs. inflation rate (Exhibit 2).

• In addition, robust domestic sales were also driven by an expanded customer base, drawn from LSK’s competitors given that LSK consistently outperformed its competitors at most mattress fairs.

• We believe could be due to increasing consumer preference for natural latex mattress (vs spring, foam and memory foam) given its higher durability, eco-friendliness and comfortability, Napure’s well-established brand name and innovative business-to-consumer (B2C) sales channel which enhances consumer confidence.

• Furthermore, LSK plan to introduce organic natural latex mattress to the domestic market under the brand name Napure in 2023F. This series of mattress has been exported to USA and European markets, receiving positive feedback. The selling points include healthier lifestyles and environmental friendliness. The price could be 15% higher than the regular range of RM3K-8K per mattress.

• Lastly, LSK and Korean-based Cuckoo International (Malaysia) (Cuckoo) are collaborating to commercialise an enhanced version of the A-series mattress with comparable pricing but increased quality by 2Q/3Q2023. We believe this to be in line with our forecast of selling 25K A-series mattresses in FY23F.

• 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 3), 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 9.2x – 21% discount to its 5-year median of 11.7x while offering a decent dividend yield of 4.4%. Also, LSK has a healthy net cash position of RM11mil (9% of market cap).

Source: AmInvest Research - 8 Mar 2023