• We maintain BUY on Lee Swee Kiat (LSK) with a lower fair value of RM0.70/share vs. RM0.86/share previously. We have reduced LSK's FY24E net profit by 11% and FY25F net earnings by 20% to account for lower sales volumes of mattresses. Our fair value is based on a FY25F PE of 10x, which is the two-year average for small-cap manufacturing companies. We attach a 3-star ESG rating to LSK.
• Despite our downward revision in LSK's earnings, we are keeping our BUY recommendation as valuation is undemanding at 8x FY25F EPS. In addition, we believe that the 24% fall in the share price from the peak of RM0.74/share in February 2024, has already reflected the soft revenue outlook.
• We understand that export sales are growing but domestic sales are unexciting. Demand for mattresses has been tepid in Malaysia as consumers are delaying purchases due to inflationary pressures. About 75% of LSK's revenue are from the domestic market while the balance 25% are exports. Outlook for export markets is positive as Korean and European customers like latex foam mattresses.
• We have assumed a sales volume growth for 1.5% for domestic sales in FY24E and 2% for FY25F. In the past years, normalised sales volume growth ranged between 3% and 5%. Currently, LSK's plants are operating at utilisation rates of 65% for latex foams, which are exported and 85% for mattresses.
• Impact of a hike in minimum wage in Malaysia is expected to be minimal as profit margins from LSK's premium mattress products are enough to cushion the higher cost. In any case, we gather that a 1% rise in selling price is enough to mitigate the hike in minimum wage. Presently, LSK does not face a shortage of workers. The group has 200 workers, mainly from Bangladesh.
• A stronger MYR does not affect LSK significantly as there is a natural hedge. Although LSK exports its latex foam products in USD, the group also imports its raw material ie. latex in USD.
• Latex cost is rising. LSK usually gives one to two months' notice to customers before raising prices. Also when LSK receives an order, the group would obtain quotes for latex cost and reflect it accordingly in the contract value. According to Bloomberg, average price of Thailand latex was US$1.83/kg in 9MFY24, 55.1% higher than US$1.18/kg in 9MFY23.

Source: AmInvest Research - 14 Oct 2024