Investment Highlights

• We maintain BUY call on Lee Swee Kiat Group (LSK) with a lower fair value (FV) of RM1.19/share (from RM1.27/share previously), based on FY24F target PE of 11x, at parity to its latest 5-year median. There is no ESG-related adjustment based on our 3-star rating.

• LSK’s 1HFY23 core net profit of RM6.4mil generally came in slightly below expectations, accounting for 46% of both our earlier FY23F earnings and street’s. As a comparison, 1H accounted for 47%-49% of FY19-22 core net profit. The deviation is mostly attributed to lower-than-expected sales of Cuckoo’s Aseries mattresses in 1HFY23. Hence, we trimmed FY23F-25F net earnings by 4%/6%/6%.

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

• On a YoY basis, LSK’s 2QFY23 core earnings declined by 16% to RM2.6mil, despite a flattish revenue at RM31.1mil. The weaker core earnings were mainly impacted by higher staff costs following the implementation of minimum wage in May 2022.

• The export segment remained sluggish in 2QFY23 amid weakening global economic growth due to high inflation and tightening monetary climate.

• On a QoQ basis, LSK’s 2QFY23 core earnings contracted by 30% despite a 5% increase in revenue. This was mostly due to the average latex price in 2QFY23 being 6% higher than in 1QFY23.

• Notably, the utilisation rate of the 2 latex foam plants was 45%, similar to 1QFY23 but below our expectation of 50%. Hence, we lowered our FY23F plant utilisation rate to 58% from 59% previously, premised on 60% in 3Q and 80% in 4Q.

• On a positive note, LSK guided that there could be a recovery in export demand beginning in 3QFY23 onwards, supported by orders from new customers benefiting from trade diversion to Asian ex-China regions.

• Notably, LSK recorded total sales of 6k A-series mattresses in 1HFY23, which was comparable to 1HFY22, but below our 20k assumption for FY23F. Hence, we cut FY23F-25F A-series mattresses sales to 14K/25K/35k from 20k/37k/51k.

• 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 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 FY24F PE of 7.2x – 35% discount to its 5-year median of 11x while offering an attractive dividend yield of 5.8%. Also, LSK has a healthy net cash position of RM7mil (5% of market cap).

Source: AmInvest Research - 22 Aug 2023