Investment Highlights

• We maintain 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 ESG-related adjustment based on our unchanged rating of 3 stars.

• LSK’s 1QFY23 core net profit of RM3.7mil generally came in  within expectations, accounting for 26% of both our FY23F  earnings and street’s. As a comparison, 1Q accounted for an  average of 26% of FY19-22 core net profit. Hence, we maintain to  FY23F-25F net earnings.

• No interim dividend has been declared in this quarter as LSK  historically declares post-4Q dividends over the past 5 financial  years.

• On a YoY basis, LSK’s 1QFY23 core earnings remained flattish at  RM3.7mil, despite a 3% decline in revenue to RM29.7mil which  was mainly dragged by lower exports. The stable core earnings  were mainly supported by 7% YoY lower average latex costs in  1QFY23 as compared to 1QFY22, as well as an improved product  mix with higher margin domestic sales and a lower effective tax  rate of 14.9% (vs. 16.4% in 1QFY22).

• The export segment remained sluggish in 1QFY23 amid  weakening global economic growth due to high inflation and  tightening monetary climate. Consequently, the utilisation rate of  the 2 latex foam plants was 45%, which is lower than 50% in 3Q4QFY22 and 77.5%-79% in FY19-21. 

• On a positive note, LSK guided that there could be a recovery in  export demand beginning in 3QFY23F onwards, as the group  received more enquiries from various international trade  exhibitions compared to FY20-22.

• On a QoQ basis, LSK’s 1QFY23 core earnings contracted by 27% to RM3.7mil from RM5.2mil in tandem with a 16% decline in  revenue. This was mostly due to traditionally higher year-end  sales in 4QFY22. 

• We continue to favour LSK for (a) being the largest natural latex  mattress manufacturer in Malaysia, (b) it is expanding market  share of natural latex mattress vs. domestic peers (Exhibit 2), 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 8.9x – 24% discount to its 5-year median of 11.7x while offering a decent  dividend yield of 4.5%. Also, LSK has a healthy net cash position  of RM4.2mil (3% of market cap).  

Source: AmInvest Research - 30 May 2023