Investment Highlights

• We maintain BUY call on Lee Swee Kiat Group (LSK) with a higher fair value (FV) of RM1.39/share (from RM1.21/share previously) to reflect increased earnings estimates and raised FY24F target P/E of 12.8x (+0.5 SD above its latest 5- year median) to account for better-than-expected result and improved YTD liquidity. There is no ESG-related adjustment based on our neutral 3-star rating.

• LSK’s FY23 core net profit of RM16mil came in above expectations, 14% higher than our forecast and 13% of street’s. The deviation was primarily attributed to LSK's efficient cost management while revenue was in line with our expectation.

• Hence, we increased FY24F-25F earnings by 3%/6% to account for the lower cost structure. In addition, we introduce FY25F earnings with a 15% YoY growth, mainly driven by its expanding market share of natural latex mattress vs. domestic peers and sales of A-series mattresses in collaboration with Korean-based Cuckoo International (Malaysia).

• LSK declared a dividend of 3.5 sen/share in 4QFY23 (implying a payout of 35%), which is similar to our forecast. In addition, the group also proposed a special share dividend by distributing treasury shares on a basis of 1 for every 25 existing ordinary shares. This will mildly improve the liquidity of the shares.

• On a YoY basis, LSK’s 4QFY23 core earnings increased by 18% to RM6mil, despite a 3% decline in revenue due to softer domestic demand. The robust core earnings were mainly attributed to an increase in deferred income associated with Cuckoo's A-series mattresses.

• On a QoQ basis, LSK’s 4QFY23 core earnings expanded by 72% despite a moderate 4% increase in revenue attributable to higher domestic year-end sales and larger market share. The stronger core earnings were further boosted by better product mix and lower latex prices (-10% QoQ). Notably, export market weakened by 21% QoQ, mainly impacted by the Red Sea crisis.

• Going into 1QFY24F, we expect LSK to register stronger sequential revenue and earnings, supported by a recovery in export markets, especially new orders from Australia, coupled with strong YTD domestic sales possibly as a result of robust property market.

• 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 attract the affordable segment.

• The stock currently trades at a compelling FY24F PE of 11x – 35% lower than its 5-year peak of 20x while offering an attractive dividend yield of 4% in FY24F.

Source: AmInvest Research - 28 Feb 2024