Investment Highlights

• We maintain BUY call on Lee Swee Kiat Group (LSK) with an unchanged fair value (FV) of RM1.02/share, based on 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.

• We maintain FY23F-25F earnings after our recent follow-up with the management.

• LSK’s export segment has been sluggish in FY22 amid weakening global economic growth due to high inflation and tightening monetary climate. Consequently, FY22-1QFY23 utilisation rate of the 2 latex foam plants was at 45%-50%, which is lower than 78%- 79% in FY19-21.

• We believe that 2QFY23F utilisation rate could remain unexciting at 45%-50% given that management has not observed a material demand recovery.

• On a positive note, LSK continues guiding that export demand could recover meaningfully in 3QFY23F onwards, as the group received more enquiries from recent international trade exhibitions compared to FY20-22.

• We gathered that this was driven by customers relocating to suppliers based in Asian regions instead of a demand recovery. We believe this is a consequence of experiencing energy shocks in European regions and supply chain disruptions during China’s lockdowns, which prompted regional risk diversification/ management decisions among customers.

• For instance, in mid-2022, US-based Tempur-Sealy International (the world's largest bedding provider) announced that the group will diversify its sourcing to safeguard against the effects of factory closures affecting some of its China-based suppliers, as Shanghai was largely under lockdown back then.

• Separately, LSK stated in its Mar 2023 briefing that the group has entered into negotiations with 3 large potential customers from USA, South Korea and Australia given LSK’s competitive pricing and established brand names ie. Napure. These negotiations could be concluded in 2Q/3Q2023.

• LSK updated that a USA-based customer placed its maiden, albeit modest, orders in June, where we expect orders to increase gradually MoM in 2HFY23F. Meanwhile, LSK sent latex foam samples to a South-Korean-based customer in Apr 2023, and the evaluation process is expected to conclude in Aug/Sep 2023 (3QFY23). Lastly, an Australian-based customer is still at the negotiation stage with no timeline provided.

• Hence, LSK expects latex plant utilisation rate to improve from 45%-50% in 1HFY23 to 80%-100% in 2HFY23F. For now, we assume FY23F utilisation rate of 64% based on 50% in 2QFY23F and 80% in 2HFY23F.

• On the domestic front, demand remains strong in Apr-May 2023. We believe domestic demand continues to grow in 2H2023 supported by labour market still having room for further improvement, given (a) recent unemployment rate of 3.5% in Mar 2023 is still higher than 3.3% in 2019, and (b) total vacancy of 119K in the labour market is still 1.5x more than the pre-pandemic average of 81K. Furthermore, the increase in entitlement threshold for overtime work from ≤RM2K/month to ≤RM4K/month effective Jan 2023 could enhance consumers’ purchasing power.

• 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 1), 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 10x – 15% discount to its 5-year median of 11.7x while offering a decent dividend yield of 4%. Also, LSK has a healthy net cash position of RM4mil (3% of market cap).

Source: AmInvest Research - 10 Jul 2023