• Lee Swee Kiat Group (LSKG) is expected to benefit from full economic reopening amid a recovery in demand for mattresses from local and overseas markets, and higher contribution from new collaboration with Cuckoo Malaysia. Its prospects will also be spurred by its healthy net cash position.

• LSKG is a niche player of 100% natural latex and mattress which manufacture natural latex bedding, mattresses and bedding accessories.

• Nonetheless, inflationary risk may dampen consumer spending ability and therefore, our cautious stance.

• We initiate coverage on LSKG with a BUY call and TP of RM0.83 pegged at 10.1x PER (20% discount to average 5-year historical PE) to FY23F EPS of 8.2 sen.

Largest natural latex bedding manufacturer

(LSKG) has been in operation for over 45 years and the group reached its pinnacle when it was listed on Bursa Malaysia in 2004. The group is the largest natural latex bedding manufacturer in Malaysia and its product was the first and only certified organic latex bedding manufacturers under the Global Organic Latex System (“GOLS”). This sets the group apart from its competitors and therefore, a growing market base for the group in the future.

Robust earnings growth across all segment

We project LSK core profit to grow at a 3-year CAGR of 24.8% (FY21- FY24F) on the back of stronger contribution across all business segments thanks to full economic openings and by extension, economic recovery. We anticipate its Rental model from Cuckoo Napure mattress to hit a range of 18k to 20k of sales volume in FY22F (FY21: 7k sales volume) with an estimated RM100mn revenue in between FY22F until FY24F.

Offers attractive dividend yield of c.5%

We project LSKG to sustain its earnings at c.RM11.7-14.5mn over FY22F-FY24F supported by improvement across all segments. We estimate the company would pay 3.5 - 5.5 sen DPS for FY22F-24F owing to its strong free cash flow generation which implies an attractive dividend yield of 5.0 – 8.0%.

Initiate with BUY and TP of RM0.83

We initiate coverage on LSKG with a BUY recommendation and TP of RM0.83. Our TP is based on PER of 10.1x, a 20% discount to average 5-year historical PE that is pegged to FY23F EPS of 8.2sen. The discount to attach PE is fair given challenging outlook such as rising input costs (shipping rates and minimum wages) and higher inflation which may dampen consumer spending ability.

Source: BIMB Securities Research - 18 Aug 2022