KUALA LUMPUR: Natural latex foam mattress manufacturer Lee Swee Kiat Group Bhd (LSK Group) — whose share price hit a 10-year high last week — is cutting its double-digit revenue and profit growth forecast for the financial year ending Dec 31, 2015 (FY15) to single-digit, after its domestic sales were tripped up by the goods and services tax (GST) that came in on April 1, and have fallen some 40% to 50% since then.

“Our initial estimation was a drop of around 30% [in sales], but the impact is stronger than what we had anticipated. Hopefully, this won’t last too long and we can be back to normal in six to nine months,” LSK Group (fundamental:1.7; valuation:1.1) managing director Eric Lee told DigitalEdge Daily last week.

Lee, however, said he was a little perplexed by the huge drop in sales as he felt that the market segment LSK Group is in shouldn’t be that badly affected by the GST.

“I would say it is mainly due to consumer sentiment. A lot of people feel unsure. Politically, there are also a lot of uncertainties, [so] a lot of people are deferring their purchases,” he said.

The group has now earmarked about RM2 million to promote its brand and to strengthen its market presence.

“Initially, we planned for at least a double-digit [growth] ... we are still confident of [at least a] single-digit growth in revenue and profits,” Lee added.

The 40-year-old LSK Group has distinguished itself in the mattress market with its 100% natural latex mattresses under the brands Napure, Englander and Tempur. Its products mainly target the premium market segment.

Lee said there are no official statistics of its market share, but claimed that Tempur is the leading brand in the premium bedding market — it retails at RM10,000 and above — while Napure leads the overall natural latex foam bedding market in terms of sales volume.

Domestic sales account for about 40% of its total revenue, while exports make up the remaining 60%. The strong export sales are now partially offsetting the group’s weaker domestic sales.

Currently, the group exports to South Korea, Japan, Singapore, Australia, Europe and Canada. The group appoints distributors overseas to sell its Napure and Englander mattresses. It also sells its latex foam to overseas companies for the production of mattresses.

The group is naturally hedged against major ups and downs in foreign exchange, as it pays for its imports of raw materials using its export proceeds, both of which are denominated in US dollar.

“But we have more exports than imports, so we have an excess of US dollars. We have some hedging, but we don’t hedge all of them. The depreciation of the ringgit to a certain extent benefits us,” Lee said.

Year to date (YTD), the ringgit has depreciated 9.57% to 3.8310 last Friday.

Lee said the group’s existing factory in Klang is currently running at near-full capacity, and is looking at investing RM4 million to install a new production line by year end. This will add an extra 30% capacity to its existing production of 400 tonnes of latex a month.

“We are continuously improving our operations. We keep our costs lean. We improve our efficiency, our capacity. When the top line is growing and you can control the increase in overhead, your margin will grow,” he said.

For FY14, LSK Group’s net profit almost tripled to RM4.1 million from RM1.38 million for FY13, on the back of strong growth in sales, better sales mix and tight cost control. Revenue was up 19.43% to RM73.15 million from RM61.25 million previously. For the first quarter ended March 31, 2015 (1QFY15), net profit doubled to RM1.37 million from RM601,000 for 1QFY14, while revenue rose 34% to RM22.6 million due to strong pre-GST demand.

Moving forward, LSK Group aims to enter China’s market in the near future, if the opportunity arises.

“We are still open for discussion, but nothing is concrete at the moment,” Lee said, adding that Chinese consumers are brand-conscious and will appreciate good products, hence he is confident that demand for natural latex products in China will be high.

He noted that the group is currently in “a very healthy cash position”, which allows it to grab any opportunity that comes its way.

As at Dec 31, 2014, LSK Group’s cash and bank balances stood at RM13.32 million, while borrowings were at RM16.17 million. Its gearing ratio stood at 0.51 times.

Lee explained that some of LSK Group’s borrowings were “flexi-loans”. The bank would only charge interests if the group draws down its cash account.

“If we have cash in our account, there would be no interest. So, there is flexibility. In our FY14 report, we had RM12 million cash, so overall, we are in a comfortable position.

“As we have some reserve cash, which is reserved for expansion, we will embark on mergers or acquisitions if there are any good opportunities,” he said.

Shares in LSK Group closed unchanged at 36 sen last Friday — they hit a 10-year high of 38 sen on July 29 — with a market capitalisation of RM60.41 million. YTD, the share price has gained 118.18%. As recently as July 8, it was trading at just 21.5 sen (up 67.44% since then).

The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in Digital Edge Daily, on August 3, 2015.