Investment Merits

• Market-leading position

• Diversified sales channels

• Cuckoo rental business bearing fruit

• Healthy balance sheet with strong track record of dividend payment

Company Profile

Lee Swee Kiat Group is the largest natural latex manufacturer in  Malaysia with annual c.7,000 tonnes of centrifuged latex production  capacity. It produces both finished mattresses, which are sold under its  own brands (Napure & Englander), as well as semi-finished goods  (latex foam) for export (24% of FY22 revenue). In the finished mattress  segment, it also produces spring-based mattresses with latex padding.  It has two manufacturing facilities of 440,000 sq ft area housing six latex  production lines and 350 employees. It has both local and export sales  to countries including Korea, China, Canada, United States, Japan as  well as Europe etc.

Highlights

Diversified sales channels. It has diversified sales channels locally  including business-to-consumer or B2C, wholesales, and rental  business model through Cuckoo (started since FY21). It also operates a  total of 16 sales outlets consisting of International Brands Gallery (IBG)  retail stores and mattress factory outlet stores.

Expecting recovery in export sales. The demand of global latex  mattress market is anticipated to grow by CAGR of 7% from 2022 to 2032 driven by consumers’ growing preference for a luxurious lifestyle  that caters to better sleeping products (Future Market Insights). As  Malaysia is the fourth largest natural latex producer in the world, LSK is  expected to benefit directly from the increasing market demand with its  strategic location in Malaysia. The group is expecting its export sales of  latex foam to recover in FY23F with the decline in freight costs. It is also  looking to ramp up its exports sales by participating in overseas  marketing events or exhibitions as the borders have opened.  Management is currently in talks with several new export clients.

Local sales to be propelled further. Its domestic sales should  continue to drive its strong sales momentum, premised on higher  mattress demand from more vacant possession of properties seen in  Malaysia. LSK has been collaborating with Cuckoo Malaysia for the  rental model since FY21. Since then, the collaboration has been  growing well from 7k units sold in FY21 to 12k units sold in FY22 as it  offers affordability to its untapped middle income customers and  increases awareness of mattress quality, especially for back/spine  purposes. Going forward, LSK is targeting sales of 20k units in FY23F  with a wider product range and marketing strategy. We also expect  higher profit margin for Cuckoo sales due to accrual cost accounting standard where the product cost is only charged out in the first year of  product delivery.

Strong net cash position with sustainable dividend policy. As at 31  Dec 2022, LSK has a net cash position of 10 sen per share. The group  has a dividend policy of minimum 30% of PAT. In the past five years, its  dividend payout ratio ranged from 41-65%

Company Report Card

Results highlights. FY22 revenue and net profit increased 23.3% and  70% YoY, attributable to improved sales from the domestic market with  a broad based improvement in various sales channels.

Strong net cash position. The group has a healthy balance sheet with  net cash of MYR16.8m or MYR0.10 per share as at FY22. We expect  LSK to stay in a net cash position for FY23F-24F.

ROE. Over the past three years, its ROE ranged between 11.5% and  19.7%. With the expected rise in FY23F-24F earnings, group ROE  should also increase gradually.

Dividends. The group has also consistently paid dividends every year  since its IPO. In the past five years, LSK’s dividend payout ratio ranged  between 41% and 65%. We expect it to continue paying dividend of at  least 40% of its PATAMI going forward, which translates to over 4% of  dividend yield.

Management. LSK is helmed by Managing Director cum CFO Dato’  Eric Lee Kong Sim, who is responsible for overseeing the overall  operational function of the group. He is supported by the senior  management team, comprising individuals with outstanding professional  qualifications and over 10 years of experience in their respective fields.

Investment Case

Fair value of MYR1-1.35. We like the stock for its leading market  position in the latex bedding industry. LSK’s business will benefit from  strong demand growth for high-quality mattresses from more domestic  property vacant possession, while its export latex business is expected  to benefit from increasing international marketing activities as borders  have opened. Based on an ascribed P/E of 10-13x on 2024F earnings,  we derive a fair value range of MYR1-1.35. We believe that our  valuation is fair given it is still at a discount to the local consumer  discretionary sector’s 2-year forward P/E of 25x.

Key risks include the inability to secure new contracts, non-continual of  Cuckoo collaboration, drop in foreign demand due to lower consumer  spending, human capital scarcity, and limited brand presence.

Source: RHB Securities Research - 16 May 2023