Investment Highlights

• Maintain BUY on Lee Swee Kiat (LSK) with a lower ex-bonus fair value of RM0.86/share, which is derived by pegging to FY25 PE of 10x – the average for small-cap manufacturing companies. Note that our fair value has been adjusted for a 1-for-2 bonus issue that was completed in Jun 2024. Our neutral 3-star rating is unchanged.

• No dividend was paid in the period, which is consistent with last year.

• 1H2024 net profit of RM5.8mil (-8.3 YoY) was within our expectations. Net margin has declined by 177 basis points YoY mainly due to a spike in latex prices (+18% YoY). ASP remained largely stagnant YoY.

• LSK has fully disposed of its 60% interest in Homeplus furniture for RM0.3mil, resulting in a small gain of RM0.1mil. There was also a small impairment resulting in a credit loss of RM0.1mil, which has an immaterial net effect to LSK.

• The outlook statement is mixed. The price of latex and other raw materials is still volatile, but generally trending lower than in 1H2024. However, the recent appreciation of RM against major currencies will impact on realised export value. Furthermore, the market is becoming more competitive, which limits LSK’s ability to boost ASP.

• Net cash has been reduced by 21% QoQ to RM15.7mil due to working capital changes. This is seasonal in nature as production typically ramps up in 2Q-3Q ahead of the busy year-end season.

• LSK generated a free cash flow (FCF) of RM2.3mil in 1H2024, 12% higher than the same period last year.

• Given the net cash and strong FCF generation, the company is in a comfortable position to pay more dividends. Our forecast assumes a payout ratio of 50%, but we believe the company can pay more.

• LSK is currently trading at 6x FY25 P/E, which is at a substantial discount to the typical average of 10x for small- cap manufacturing companies.

• We believe LSK is significantly undervalued relative to its growth prospects (3-year forward CAGR 11%), net cash balance sheet and ROEs of >20%. The dividend yield is also decent at 5%.

Source: AmInvest Research - 3 Sep 2024