Klang-based Lee Swee Kiat Group Bhd (“LSK”) known as the largest manufacturer of natural latex mattresses in Malaysia, produces both finished mattresses as well as semifinished goods such as latex foam. We like LSK premised on (i) synergistic collaboration with Cuckoo Malaysia ‘Cuckoo Napure’ which allow LSK to receive recurring rental income; (ii) direct B2C sales channels for improved operating efficiency that offers margin expansion; and (iii) robust local sales recovery. Consequently, we forecast its FY23 and FY24 net earnings to grow at 20% and 16.2% respectively. BUY with TP of RM0.97 premised on PER of 10x (3 years average PE) on FY23EPS of 9.7sen.

LSK, with its local expertise, has collaborated with Cuckoo to develop and launch the Cuckoo Napure crossover, known as the A-series mattress, which operates on a rental-based business model, providing LSK with recurring monthly rental cash flow over a fixed number of installments. With over 50,000 Cuckoo agents across Malaysia, this has expanded LSK's total addressable market thus resulted in a 113% YoY growth from RM9.8m to RM20.87m in Cuckoo Napure sales in FY22. Management believes this business relationship would improve its top line in the coming 3 years without incurring significant marketing expenses.

Cuckoo Napure's innovative B2C sales model boosts consumer confidence by dealing directly with end-users, minimizing the risks of intermediaries absconding. This approach also increases the efficiency of the sales process and reduces transaction costs, which helps to achieve better operating efficiency that translates into profitability margin expansion.

LSK's export division was faced with challenges in 2022, as contributions declined from 44.5% in FY21 to 24.5% in FY22. As such, management will focus on marketing overseas sales this year. Meanwhile, the strong rebound in domestic sales propelled LSK's topline with a 67.9% YoY growth in FY22. We anticipate a positive sales trend for LSK bolstered by the cash handouts to the B40 group, and a relatively stable job market.

As at end of Dec 2022, LSK has a net cash of RM16.8m. The company declared a 40% dividend payout in FY22, which is more than the 30% dividend payout policy. Nonetheless, we assumed a 30% payout over the next 2 years translating to a dividend yield of 3.7% and 4.3% respectively.

Source: Rakuten Research - 6 Apr 2023

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