• We maintain BUY call on Lee Swee Kiat Group (LSK) with a slightly higher fair value (FV) of RM1.21/share (from RM1.19/share previously) to account for higher earnings estimates. Our FV is based on an unchanged FY24F target PE of 11x, at parity to its latest 5-year median. There is no ESG-related adjustment based on our neutral 3-star rating.

• LSK’s 9MFY23 core net profit of RM9.9mil generally came in above expectations, accounting for 74% of both our earlier FY23F earnings and street’s. As a comparison, 9M accounted for 58%- 64% of FY19-22 core net profit.

• The deviation was primarily attributed to LSK's efficient cost management, which enhanced 9MFY23 core profit margin, while revenue was in line with our expectation. Hence, we increased FY23F-25F earnings by 5%/2%/1% to account for higher core net margin assumptions with unchanged revenue estimates.

• 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 3QFY23 core earnings spiked up by 87% to RM3.5mil, despite a mild 3% growth in revenue. The stronger core earnings were mainly driven by a 27% YoY demand recovery in export markets, especially from Europe, coupled with lower cost structure.

• To recap, the export segment has been sluggish since FY22 until 2QFY23 as a result of weakening global economic growth due to high inflation and tightening monetary climate.

• Notably, utilisation rate of the 2 latex foam plants was 60% in 3QFY23 (vs. 45% in 2QFY23), which was consistent with our expectation. Hence, we maintain plant utilisation rate assumption of 58% for FY23F and 80% in 4QFY23.

• On a QoQ basis, LSK’s 3QFY23 core earnings expanded by 35% despite a moderate 5% increase in revenue. This was mostly due to stronger higher exports, a 3% decline in the average latex price and lower marketing costs for the domestic division.

• Going into 4QFY23, we expect LSK to register stronger revenue and earnings QoQ, supported by continued robust exports coupled with seasonally stronger domestic sales in 4Q underpinned by year-end sales.

• 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 6.9x – 37% discount to its 5-year median of 11x while offering an attractive dividend yield of 6% in FY24F. Also, LSK has a healthy net cash position of RM11.6mil (9.5% of market cap).

Source: AmInvest Research - 28 Nov 2023