Lee Swee Kiat (LSKG) 2Q23 net profit of RM2.6mn (QoQ: -22.9%, YoY: - 14.8%) was in line with our expectations, accounting for 46%, but fell below the consensus of 44% for the full-year forecast. Revenue and earnings on a YoY basis declined by 0.9% and 14.8% respectively attributed to persistent weak demand from the export division, coupled with increased costs related to latex and overall expenses. No dividend was declared. We anticipate stable earnings from LSKG supported by strong domestic sales, a rise in sales volume from Cuckoo-Napure, and the strengthening of the Ringgit. Reiterate a BUY call on LSKG with a TP of RM0.93. Our valuation is based on 11.3x PER that is pegged to FY23F EPS of 8.2sen.

• Within expectations. The 2Q23 net profit of RM2.6mn (QoQ: -22.9%, YoY: -14.8%) was in line with our expectations, accounting for 46%, but fell below the consensus of 44% for the full-year forecast.

• Dividend. No dividend was declared in 2Q23. Historically, LSKG typically pays dividends during the fourth quarter of each year.

• QoQ. LSKG's 2QFY23 revenue jumped 4.7% to RM31.1mn, driven by strong sales from the domestic division. However, earnings were still affected by lower export sales and higher latex costs.

• YoY. Revenue and earnings declined by 0.9% and 14.8% respectively due to prolonged lackluster demand from export division, higher cost of latex (6.2% higher YoY) and operating expenses. This resulted in a squeezed core profit margin of 8.5% in 2Q23, compared to 9.8% in 2Q22.

• Outlook. We expect stable earnings in 2023 to continue due to 1) expected strong sales in domestic segment thanks to full economic reopening, 2) 20k targeted sales volume with c.RM35mn turnover from the Cuckoo Napure mattress, and 3) the potential benefit from Ringgit strengthening for its export business and profit margin. Nonetheless, we remain cautious of global high inflation and rising interest rates, as they may dampen demand, and there's also the possibility of proposed revisions to minimum wages in Malaysia, which could lead to higher labour costs

• Our call. Maintain a BUY call on LSKG with a TP of RM0.93. Our valuation is based on 11.3x PER that is pegged to FY23F EPS of 8.2sen.

Source: BIMB Securities Research - 22 Aug 2023