Lee Swee Kiat Group on track for record earnings in 2022

The record earnings is attributable to the recovery in consumer spending, higher mattress sales, price hikes and higher economies of scale 


CGS-CIMB Securities Sdn Bhd expects Lee Swee Kiat Group Bhd (LSK) to record higher sales which will translate into margin expansion for the company from the fourth quarter of 2021 (4Q21) onwards. 

Its analyst Walter Aw stated that this will be supported by the price increases effective in first half of 2021. 

He added that the gradual lifting of lockdown measures since October 21 has led LSK to witness a strong rebound in sales in the local market. 

“This is in tandem with the reopening of its retail outlets, as well as more large-scale furniture fairs and exhibitions being held. 

“We gather LSK has seen a surge in mattress sales in areas affected by the recent floods,” he wrote in a research note on LSK yesterday. 

Aw viewed LSK as a proxy to the recovery in consumer spending, backed by higher mattress sales, price hikes as well as higher economies of scale. 

He noted that while LSK aimed to sell 12,000 A-series mattresses (sold under LSK’s collaboration with Cuckoo International) in 2021, sales likely fell short (estimated to reach only 7,000, which is in line with the research house’s estimates) due to the impact of various lockdowns throughout 2021. 

Aw takes comfort that sales in May 21, prior to the implementation of a Full Movement Control Order in June 2021 to September 2021, was an encouraging 1,500 units. On that note, CGS-CIMB has maintained an ‘Add’ call on LSK with a target price of RM1.84, based on 13 times calendar year 2023 (CY23) price-earnings (P/E), in line with its five-year mean.

The broker made no changes to LSK’s financial year 2022 to 2024 (FY22-24F) earnings per share forecasts. 

“We continue to like LSK for its defensive business (resilient demand for beds), attractive valuation (5.5 times CY23F P/E) and strong fundamentals (high return on equity and net cash position). 

“Possible re-rating catalyst includes a spike in sales volume and higher-than-expected sales from its collaboration with Cuckoo,” he said. 

As at the end of 3Q21, LSK has a net cash position of RM5.6 million. With no major capital expenditure planned in FY22-23F (flat at RM3.5 million for FY21-23F), he expects the group’s robust balance sheet to support its dividend pay-outs (45% for FY21-23F). 

He added that with an expected rebound in LSK’s earnings, mainly in FY22-23F, this could translate into solid dividend yields of 2.9%- 8.3% for FY21-23F. 

The lifting of lockdown measures supported by better consumer sentiment and more marketing activities, LSK is confident of achieving sales of 20,000 units (185% year-on-year) in FY22F. 

“In our view, the rental model (with low initial purchase cost) offered by Cuckoo-LSK when purchasing A-series mattresses could also be an attractive proposition to buyers amid the current subdued consumer sentiment. 

“LSK expects its collaboration with Cuckoo to contribute at least 20% of its turnover from FY22F onwards,” he said.