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).
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....