Lee Swee Kiat (LSKG) 1Q23 net profit of RM3.4mn was in line with ours and consensus expectation, accounting 25.7% and 24.0% of full year estimates respectively. Earnings rose by >100% QoQ lifted by the restated value in 4Q22 due to additional provision for credit loss and deferred taxation. No dividend was declared. We anticipate stable earnings from LSKG premised on strong domestic sales, rising sales volume from Cuckoo-Napure, declining raw material cost and favourable forex hedging. Maintain a BUY call on LSKG with a TP of RM0.93 (10% discount to the PER). Our valuation is based on 11.3x PER that is pegged to FY23F EPS of 8.2sen.

• Within expectations. 1Q23 net profit of RM3.4mn (QoQ: -16.0%, YoY: - 2.9%) was in line with our and consensus expectations accounting 25.7% and 24.0% of full year forecast respectively.

• Dividend. No dividend was declared in 1Q23, similar to 1Q22.

• QoQ. LSKG's 1QFY23 revenue dropped by 16.0% due to seasonal factors. Earnings rose by >100% however as profit value in 4Q22 was restated due to additional provision for credit loss of RM0.34mn and deferred taxation of RM1.84mn for the timing difference between the recognition of the deferred interest income in the Income Statement and subjectivity to corporate taxation under the “Rent-to-Own” model of the Group’s products.

• YoY/YTD. Revenue and earnings declined by 2.9% and 6.5% respectively driven by prolonged weak demand from export division though the average latex price in 1Q23 was 27.9% lower versus preceding quarter (1Q23:RM265.50/kg, 4Q23:RM367.50/kg).

• Outlook. Stable earnings expected in 2023 to be supported by 1) strong sales in domestic segment thanks to full economic reopening 2) 20k targeted sales volume with c.RM35mn turnover from the Cuckoo Napure mattress, 3) declining raw material cost (natural latex) and 4) favourale forex hedging by matching majority of imports and exports in same currency. No significant 2023 spending capex were mentioned, except for some new allocation (RM1mn) on green energy to set rooftop solar power generation for its operation. Notwithstanding, we remain cautious given the global consumer sentiment that could go down and subsequently, affecting demand. This is in addition to inflationary pressure and ongoing supply chain disruption and hence, our unchanged earnings forecast at this juncture.

• Our call. Maintain a BUY call on LSKGG with a TP of RM0.93 (10% discount to the PER). Our valuation is based on 11.3x PER that is pegged to FY23F EPS of 8.2sen.

Source: BIMB Securities Research - 30 May 2023