Investment Highlights

• We maintain BUY call on Lee Swee Kiat Group (LSK) with an unchanged fair value (FV) of RM1.21/share, based on FY24F target P/E of 11x, at parity to its latest 5-year median. There is no ESG-related adjustment based on our neutral 3-star rating.

• After our recent follow-up with management, we maintain FY23F-25F core earnings on expectations that stronger domestic demand, especially from the wholesale segment (or B2B), will counterbalance the temporary decline in export sales in 4QFY23F.

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

• LSK registered an improvement in 3QFY23 with PU of 60% due to recovery in demand from the European markets and trade diversions away from China. Going into Oct-Nov 2023, LSK noted that the recovery momentum persisted.

• However, LSK observed that some export order delays in Dec 2023 due to the Red Sea crisis. On a positive note, export orders in 1QFY24 could be supported by new orders from Australia.

• As a result, we trimmed FY23F utilisation rate to 54% from 58% previously, mainly to account for lower PU assumption of 65% in 4QFY23 from 80% previously. We believe most of the Red Sea impact in 4QFY23 occurred in late-Dec 2023 (Exhibit 1). For FY24F, we maintain our PU assumption.

• On the domestic front, the robust demand in 4QFY23 will be well supported by the wholesale segment, underpinned by gaining market share from LSK’s peers thanks to its reputable brands at reasonable pricing without compromising on quality.

• Going into FY24F, 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, (c) recovering export markets, and (d) the recent introduction of a lower-priced A-series mattress that may benefit from increased demand.

• The stock currently trades at a compelling FY24F PE of 8.4x – 24% discount to its 5-year median of 11x while offering an attractive dividend yield of 5% in FY24F. Also, LSK has a healthy net cash position of RM11.6mil (8% of market cap).

Source: AmInvest Research - 30 Jan 2024