Investment Highlights

Lee Swee Kiat’s (LSK) 3QFY24 results were weak. Net profit was only RM1mil in 3QFY24. The group was affected by weaker domestic sales, high latex costs and an impairment on trade receivables. We downgrade LSK to HOLD from BUY with a lower target price of RM0.59/share vs. RM0.70/share previously. Our target price of RM0.59/share is based on a FY26F PE of 10x instead of FY25F originally. The PE of 10x is the five-year average for small-cap manufacturing companies.

• LSK's 9MFY24 results were 43% below our forecast and consensus. The group's results fell short of our expectations due to weak demand, high latex costs and a RM1.9mil impairment in respect of receivables in the Cuckoo rental unit. We have cut LSK's FY24F net profit by 52.4% to account for these.
• Net profit sank by 28.4% YoY to RM6.8mil in 9MFY24. We believe that domestic demand was poor as consumers deferred purchases of mattresses due to the high cost of living. As demand is soft, we reckon that LSK may not have been able to raise selling prices to offset the rising cost of latex. 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.
• Erosion in operating profit margin in 9MFY24. LSK's operating profit margin slid to 7.8% in 9MFY24 from 11.7% in 9MFY23 dragged by a higher cost of latex. On a quarterly basis, operating profit margin slipped to 4.7% in 3QFY24 from 5.8% in 2QFY24.
• 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. About 25% of LSK's revenue are from export sales.

Source: AmInvest Research - 28 Nov 2024