• Overview. Lee Swee Kiat Group (LSKG) registered a strong 3Q22 results again amid revenue and core net profit that soared by 63.6% YoY and  284.1% YoY respectively, driven by robust domestic sales with broad-based improvement in various sales channels. Its export division remained uninspiring however due to softening demand from overseas buyers as sentiment was dampened by higher inflation. Overall, LSKG’s core profit margin improved by 7.0-pps to 12.3% in 3Q22.

• Key Highlights. Due to tepid demand from the export division, the group’s segment operated with capacity utilization of only 50% in the current quarter. Meanwhile, its main raw material price which is natural latex has dwindled by 22.7% QoQ (3Q22:RM5.07/KG,  2Q22:RM6.55/KG) though rising slightly by 0.4% YoY. Additionally,  there was also impairment recognised on its Italhouse operation amounting RM1.5mn, mitigated by RM1.9mn insurance compensation pursuant to the flood incident in December 2021.

• Against estimates: Inline. 9MFY22 net profit of RM9.2mn was both in  line with our and consensus forecast at 72.0% and 72.3% respectively.

• Outlook. We anticipate incoming quarter earnings to remain favourable due to a lagged price effect (hedging mechanism with forward contracts in place) stemming from lower trend of average latex price, improving domestic sales due to full economic reopening and better-than-expected contribution from Cuckoo Napure mattress collaboration. Nevertheless, it could offset by the ongoing weak demand from overseas market. On that note, we remain cautious on inflationary risk which may dampen consumer spending ability.

• Our call. Maintain a BUY call on LSKG with a TP of RM0.83 based on  10.1x PER that is pegged to FY23F EPS of 8.2sen.

Source: BIMB Securities Research - 22 Nov 2022