Can You Sleep Soundly If You Invest In Lee Swee Kiat Group Berhad?
December 11, 2019
Lee Swee Kiat Group Berhad (“LSK” or “the Group”) was established in 1975 by its founder Mr Lee Swee Kiat. From a furniture trading company, it has grown to one of the most extensive mattress manufacturers in South East Asia with one stop production lines including natural latex foam, polyurethane foam and various spring productions.
As at 5 November 2019, the Group has a market
capitalisation of approximately RM107.40 million. In this article, we will take
a closer look at the business, management and financial aspects of the Group,
to gauge its suitability as an investment.
LSK is primarily involved in manufacturing
various types of bedding products, specialising in the production of 100%
natural latex mattresses. Besides mattresses, the Group also produces
semi-finished products, such as latex foam, which are exported to international
mattress brands. Bedding products make up more than 95% of its total turnover. More
than 50% of LSK’s products are exported.
In 1996, LSK was recognised in the Malaysia
Book of Records as Malaysia’ largest natural latex bedding manufacturer in
terms of production volume. The Group owns two manufacturing facilities that
occupy a total land area of 440,000 square feet in Klang, Selangor. The table
below shows the Group’s growth in latex production over FY2016 – FY2018.
Source: LSK’s annual reports
Besides manufacturing latex mattresses, LSK
distributes a portfolio of popular mattress brand in Malaysia and other
countries. For example, LSK is an exclusive distributor of Tempur in Malaysia,
a mattress brand owned by Tempur Sealy International Inc., the world’s largest
bedding provider. Along with distribution agreements for other popular
international brands, LSK has grown its own portfolio of mattress brands to 40
(LSK’s brands, Source: Group’s website)
In the local market, LSK sells its products
directly to customers through a growing network of retail stores, which
includes IBG, Mattress Factory Outlet and Italhouse. With its own outlets, LSK
is able to retail its products directly to consumers instead of going through distributors
or third party furniture sellers. This allows LSK’s products to be sold at more
affordable prices giving the absence of distributor mark-ups.
LSK adopts an asset-light business model and focuses on being a niche player in high value-added 100% natural latex bedding. Being based in Malaysia, the Group has a competitive advantage in terms of its strategic location where rubber supply is ample. Beside Malaysia being the fourth largest natural latex producer in the world, surrounding countries such as Thailand and Vietnam are all major producers of natural rubber.
LSK aims to build brand equity through its portfolio of brands under management. With its diverse range of bedding products, the Group aims to meet the varying needs of middle to high range customer segments. By focusing on middle to premium range, the Group looks to avoid price wars in the low-cost segment.
In the short term, LSK’s sales may be affected if there is weaker consumer spending. For example, 2015 and 2016 were extremely challenging years domestically for LSK as local demand for furniture dried up as consumers held back their spending on durables, post implementation of the Goods and Services Tax (GST) from April 2015. The further depreciation of the Malaysian Ringgit against the US Dollar also affected their distribution of imported brands as imported goods cost more for the local consumers.
Over the long term, demand for mattress products is expected to be driven by i) shorter replacement cycle for mattresses, ii) higher incomes leading to better consumer affordability, and iii) greater awareness of the importance of mattresses and quality sleep.
Any sharp increase in natural latex price in a short period of time will have a negative impact on the Group’s performance since natural latex is its main manufacturing material. While LSK has the ability to pass on the hike in raw material prices if latex prices stay at elevated levels for an extended period of time, the price increases could affect demand for their products.
LSK is actively mechanising its operations to reduce reliance on labour. The Group plans to improve the efficiency of its production lines by introducing robotic arms and more energy-efficient machinery, which should mitigate the rising labour cost.
Eric Lee and Mr Vincent Lee are
brothers and they are sons of Mr Lee Ah Bah @ Lee Swee Kiat and Madam Tan Kuin
(Source: 2018 annual report)
Since 1975, LSK continues to
be a founder-led and managed business. We like the fact that the directors are substantial
shareholders, and trust that they would be motivated to ensure the continued success
of the Group. Further, the strategic principles adopted by LSK in its major
business decision making give us greater confidence that minority shareholders’
interest are protected.
(Source: 2018 annual report)
An interesting point to note is that as at 31
December 2018, LSK holds 4,687,900 treasury shares out its 167,815,704 issued
and paid-up ordinary shares. Such treasury shares are held at a carrying amount
of RM1,840,054. As the average purchase price of each treasury share is RM0.39,
the treasury shares are considered “in the money” since they were purchased below
the current share price of RM0.64. In this case, LSK’s management has shown
proper usage of share buy-backs by acquiring its own shares when the Group’s share
price was undervalued.
(Source: 2018 annual report)
We find many positives with the LSK’s past 5
The Group has achieved revenue and profit after tax compound annual growth rate (“CAGR”) of 8.14% and 25.72% respectively. In fact, the net profit margin of the Group has improved significantly from 5.61% in FY2014 to 10.24% in FY2018, demonstrating management’s commitment to control costs.
LSK’s financial position has also improved from a net debt position of approximately RM2.85 million in FY2014 to a net cash position of RM11.34 million. This can be attributed to a healthy cash flow position.
The Group has recorded commendable return on equity ratios over the 5 years, providing that management is efficient in using and allocating investor capital. LSK has also introduced a formal dividend policy to set aside a minimum of 30% of profit after tax for dividend payment.
(Source: Google Finance)
With a closing share price of RM0.64 as at 5
November 2019, LSK is trading at a price of earnings (PE) ratio of 10.19, with
an indicative yield of 2.34%. At this valuation, I personally feel that the
stock is relatively fairly valued.
Notwithstanding the above, a report by Zion
Market Research forecasted that the global mattress market was valued at around
USD 27 billion in 2017 and is expected to reach approximately USD 43 billion in
2024, growing at a CAGR of slightly above 6.5% between 2018 and 2024.
Therefore, investors with a positive view on the prospects on the bedding
industry should put LSK on their watch list.
In addition, we believe near term catalysts for
the Group include:-
Focusing on cost efficiencies through implementation of more automation in its manufacturing process;
The Group is looking to invest RM8 million in a fully automated latex semi-foam production line in 2020; and
LSK is searching for Merger & Acquisition opportunities to grow its presence in the domestic bedding retail market. It plans to acquire business-to-consumer bedding retailers, to have more direct sales channels to market its products to consumers directly.
Therefore, I am quite optimistic about the
future of Lee Swee Kiat Group Berhad and definitively adding this
company into my personal Watchlist.
An accountant by training, F.I.R.E 2030 is a student of value investing since 2012. She believes that successful investing requires discipline and patience. But with the right knowledge and temperament, ordinary investors can achieve extraordinary results. These articles are her journals on stocks and the investing journey toward financial freedom in 2030.