• MYR1.42 FV based on 13x FY24F P/E. Lee Swee Kiat Group's (LSK) dominance in the latex bedding market and robust business-to-consumer (B2C) network are its significant strengths. The resurgence of export sales with new clients is driving growth, further supported by a strong property market that is bumping up the demand for quality mattresses. It is in a sturdy financial position, with net cash of 9 sen per share, a promising FY24F dividend yield of 6.8%, and an ex-cash P/E of about 7x.

• Biggest end-to-end mattress provider in Malaysia. LSK made a strategic shift in 2011 from agency distribution to direct B2C sales. This pivot not only enabled it to widen and preserve margins, but also foster a more direct relationship with customers. Since 2014, its B2C business has been gaining momentum, and now account for 61% of total finished product sales. Beyond being Malaysia's top natural latex bedding manufacturer, LSK has outshone other mattress brand owners by having the biggest exposure in the B2C market.

• Starting to see an uptick in local sales. Its local sales have been on an uptrend, particularly since mid-Nov 2023. This is evidenced by its performance in major home fairs in large shopping centres, with sales exceeding MYR700,000. We expect this momentum to be maintained in the current period, likely bolstered by consumers shopping for new items prior to the Lunar New Year. With plans to ramp up participating in home fairs in 2024, and a rebounding Malay market (through the Cuckoo Napure rental model, targeting sales of 15,000 units), its prospects are positive. Also, the vibrant property market in Malaysia is expected to further boost mattress sales, underpinning the growth of its domestic market share.

• Rebound in export sales another catalyst. The recovery in its business-to- business (B2B) export sales and “others” segment is vital for its latex foam plant to achieve the necessary 65% utilisation rate in order to break even. There was a drop in exports since FY22 due to high freight costs and losing key export customers. The plant's utilisation rate has risen from 45% in 2Q23 to 60% in 3Q23. LSK, expected to break even in 4Q23, is aiming to achieve an 80% utilisation rate by end-2024, with export clients from Korea and Europe while riding on the growing demand for green products (for ESG considerations). The company is also intensifying its overseas marketing efforts to sustain and grow export sales.

• Valuation. Our FV of MYR1.42 is based on an ascribed P/E of 13x on FY24F earnings, +0.5 SD from its 5-year forward P/E mean (Figure 2). The P/E is also at a 15% discount from KLSCU’s FY24F P/E of 15.2x, given its smaller market cap. This is justified, based on its anticipation of booking record-high earnings in FY23F and beyond. Key downside risks: Slowdown in local sales growth, and delays in export deliveries due to the Red Sea crisis.

Source: RHB Research - 13 Feb 2024