Lee Swee Kiat(8079.KL): Announces one-for-two bonus issue

Lee Swee Kiat: Announces one-for-two bonus issue. Mattress manufacturer Lee Swee Kiat Group (LSK) is proposing a bonus issue of up to 83.91m new shares. Shareholders will get one bonus share for two existing shares held. LSK has an issued share capital of RM16.78m comprising 161.82m shares, including 6.46m treasury shares as of March 8. The entitlement date for the corporate exercise will be determined at a later date upon receipt of relevant approvals (The Edge).

RHB Research sets a fair value (FV) of MYR1.42 for Lee Swee Kiat Group (LSK) based on a 13x FY24F P/E, highlighting the company’s dominance in the latex bedding market and robust business-to-consumer (B2C) network as key strengths. LSK’s export sales have seen a resurgence with new clients, driven by a strong property market increasing demand for quality mattresses. The company is financially strong, with a net cash position of 9 sen per share, a promising FY24F dividend yield of 6.8%, and an ex-cash P/E of about 7x.

As the largest end-to-end mattress provider in Malaysia, LSK shifted its focus in 2011 from agency distribution to direct B2C sales, leading to wider margins and a stronger customer relationship. Since 2014, its B2C business has grown significantly, now accounting for 61% of total finished product sales, surpassing other mattress brand owners in the B2C market.

LSK has experienced an uptick in local sales since mid-November 2023, particularly evident in major home fairs where sales exceeded MYR700,000. This momentum is expected to continue, supported by consumers shopping for new items before the Lunar New Year. With plans to increase participation in home fairs in 2024 and target sales of 15,000 units in the Malay market through the Cuckoo Napure rental model, LSK’s outlook is positive, aided by Malaysia’s vibrant property market.

Additionally, LSK is witnessing a rebound in export sales, crucial for its latex foam plant to achieve a 65% utilization rate for breakeven. The plant’s utilization rate has risen from 45% in 2Q23 to 60% in 3Q23, with expectations to break even in 4Q23 and achieve an 80% utilization rate by end-2024. The company is intensifying overseas marketing efforts to sustain and grow export sales, particularly targeting clients in Korea and Europe.

RHB’s FV of MYR1.42 is based on an ascribed P/E of 13x on FY24F earnings, representing a +0.5 standard deviation from its 5-year forward P/E mean. The P/E also carries a 15% discount from KLSCU’s FY24F P/E of 15.2x due to LSK’s smaller market cap, justified by its anticipation of recording record-high earnings in FY23F and beyond. Key downside risks include a slowdown in local sales growth and delays in export deliveries due to the Red Sea crisis.