• We maintain BUY call on Lee Swee Kiat Group (LSK) with an unchanged fair value (FV) of RM1.39/share, based on FY24F target P/E of 12.8x (+0.5 SD above its latest 5-year median of 11x). There is no ESG-related adjustment based on our neutral 3-star rating.

• LSK’s 1QFY24 core net profit of RM3.8mil was largely in line with expectations, accounting for 21% of our full-year forecast and consensus. We expect a stronger earnings delivery in upcoming quarters on improving export sales while latex prices may seasonally adjust from the current peak wintering cycle.

• YoY, the group’s 1QFY24 revenue commendably rose 21% to RM36mil from a 22.9% rebound in export sales. However, average latex price rose 20% YoY, causing 1QFY24 EBITDA margin to decline 2.3%-point to 16.5%. Coupled with a higher effective tax rate of 18% vs 14.9% from deferred tax provisions, the group’s 1QFY24 core net profit inched up by only 1% YoY.

• Sequentially, 1QFY24 revenue rose 5% but core net profit dropped 38% mainly due to the seasonal increase in latex costs.

• Looking forward, management is cautiously optimistic on overseas demand recovery from a low base over the past 2 years with the Cuckoo Napure mattress collaboration accounting for 22% of LSK’s group revenue.

• 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 from the price-sensitive affordable segment.

• The stock currently trades at a compelling FY25F PE of 8x – 27% discount to its 5-year median of 11x while offering an attractive dividend yield of 5%. Also, LSK has a healthy net cash position of RM20mil (12% of market cap).

Source: AmInvest Research - 28 May 2024