Lee Swee Kiat Group Bhd
(Aug 21, RM1.03)
Maintain add with a higher target price (TP) of RM1.28: Lee Swee Kiat (LSK) first half of financial year 2018 (1HFY18) revenue rose 44.3% year-on-year (y-o-y), thanks to higher sales volume of finished mattresses and semi-finished latex foam. Also, 1HFY18 earnings before interest and tax (Ebit) margins expanded 4.7 percentage points (ppts) y-o-y to 9.7% as a result of higher economies of scale and lower raw material prices.

 
Accordingly, 1HFY18 net profit grew 198.8% y-o-y to RM4.1 million despite a higher tax rate of 8.5% (+0.8% pts y-o-y). Overall, 1HFY18 net profit was within expectations at 45% of our full-year estimate as 2H is typically a stronger period. On a quarter-on-quarter (q-o-q) basis, second-quarter (2QFY18) revenue declined 1.4% while 2QFY18 net profit fell 2.2% to RM2 million.

We attribute the marginally weaker q-o-q performance in 2QFY18 to: i) lower sales of finished mattresses due to weak consumer sentiment during both pre-election and pre-zero goods and services tax periods and ii) a stronger ringgit versus US dollar leading to some foreign exchange losses in its export sales.

This also resulted in a slight dip in 2QFY18 margins to 9.6% (-0.3% ppts q-o-q). Both of LSK’s new semi-foam latex production lines have started full commercial production since June 18. In total, its production capacity has grown by 50% to 6,000 tonnes a year.This new capacity will cater for increased orders from both new and existing customers.

Moving into 2HFY18, we expect LSK to record stronger quarters ahead. Our optimism is based on: i) the recent weakening of the ringgit against the US dollar, ii) continual decline in latex prices and iii) expected increase in production volume.We continue to like LSK for its: i) strong earnings growth potential (FY18-FY20F EPS compound annual growth rate of 33.5%), ii) strong earnings visibility, and iii) undemanding valuations. Downside risks are i) a sharp increase in natural latex prices, and ii), weaker consumer spending. — CGSCIMB Research, Aug 20