KUALA LUMPUR: Lee Swee Kiat Group Bhd (LSK) expects export sales to rebound in FY23, particularly in the second half (2H) of FY23, premised on the decline in freight charges since the 2H of 2022 and more marketing activities, especially in international trade fairs.

"LSK is currently speaking to several new export clients and looking to finalise orders in the near term," CGS-CIMB Research said in a recent note.

To recap, LSK's export sales declined 32 per cent year-on-year (YoY) in FY22, making up 24.5 per cent of total FY22 revenue from 44.5 per cent in FY21.

On the domestic front, CGS-CIMB Research noted that LSK expects its strong sales momentum to continue in FY23.

The company continues to see robust demand for mattresses from end-consumers and via business-to-business (B2B) clients.

CGS-CIMB Research said LSK is riding on its strong product proposition, backed by the company's strong in-house manufacturing capabilities and lower market competition (less supply of bedding product manufacturers due to weak economies of scale).

"Going forward, LSK is confident of posting stronger margins.

"In contrast to gaining margins by raising selling prices for existing products, LSK aims to enhance the profitability of its product mix by launching more products with value-added offerings, such as organic certified latex bedding goods.

"In addition, it expects lower input costs to translate to margin gains in FY23," CGS-CIMB Research said.

On its collaboration with Cuckoo Malaysia, LSK targets a sales volume of 20,000 Cuckoo Napure beds in FY23, in line with CGS-CIMB Research's expectations.

This is backed by more marketing activities planned by Cuckoo and rising brand recognition since the collaboration was launched in 2020.

"We believe revamping its monthly repayment structure (extended to five years from three years previously) in 2H of 2022 should improve consumer affordability, leading to higher sales.

"Also, LSK is looking to add more products sold under this collaboration, including upgraded models," CGS-CIMB Research noted.

CGS-CIMB Research made no changes to its FY23-25 earnings per share (EPS) estimates.

"We keep our Add call with a target price of RM1.23.

"We continue to like LSK for its strong earnings growth prospects, undemanding valuations of 8.4x for 2023 price-to-earnings (P/E) ratio and strong net cash position of RM16.8 million as of end-December 2022.

Re-rating catalysts for LSK include a sharp increase in sales volume of semi-foam latex and/or higher-than-expected sales from its collaboration with Cuckoo.

Downside risks are mainly a surge in latex prices and/or a sharp decline in consumer spending ability.