This article first appeared in The Edge Malaysia Weekly on March 18, 2024 - March 24, 2024

HAVING shaken off the adverse effects of the Covid-19 pandemic and endured the subsequent loss of a major overseas customer amid challenging market conditions, Klang-based mattress manufacturer Lee Swee Kiat Group Bhd (LSK) is reaping the fruits of its efforts to fortify its sales channels and it plans to notch up production capacity for its next phase of growth.

Thanks to a rebound in the domestic market late last year, LSK posted a 2½-fold jump in net profit to RM4.12 million for the fourth quarter ended Dec 31, 2023, from RM1.6 million in the previous corresponding quarter. Revenue was 3.25% lower at RM34.21 million.

Net profit for the full financial year of 2023 came in at RM13.65 million from RM10.85 million previously on lower revenue of RM127.7 million (from RM129.02 million previously).

“Last year was challenging but we are quite happy with the improved margins in our results,” LSK managing director Datuk Eric Lee tells The Edge in an interview in Kuala Lumpur.

The group’s improved financial results are also reflected in its growing dividend payout, which grew from one sen in FY2016 to 3.5 sen last year. And last Wednesday, shareholders were rewarded by the announcement of a bonus issue of one share for every two existing shares.

This may have supported the 48.75% surge in its share price from the 80 sen level on Jan 17. At its close of RM1.08 last Thursday, LSK was valued at RM181.24 million.

“In the domestic market, consumer confidence was particularly poor during the second quarter last year. Our projections for double-digit growth last year didn’t come to pass due to weaker overall sales, owing to the global environment of high inflation and high interest rates. However, the domestic market rebounded significantly in the fourth quarter,” recalls Lee, adding that sales in January this year continued to do “exceedingly well, thanks to a rebound in domestic sales possibly from pent-up demand”.

LSK’s product offerings include its own in-house brands Napure and Englander (for which LSK has acquired the trademark for Asean), exclusive distributorship of US bed brand Tempur and recliner label Stressless. The mattresses are distributed mainly through direct business-to-customer (B2C) channels, which contribute 45% to total revenue (70% to domestic sales), followed by exports (22%), wholesale (9%), Cuckoo-Napure distribution network (20%) and others.

Napure alone makes up about 50% of the group’s sales.

Where acquisitions are concerned, LSK has spent about RM10 million in various transactions in the past five years, including the acquisition of retail showroom chain Mattress Factory Outlet Sdn Bhd and Johor-based furniture business Italhouse, which now serve as LSK’s showrooms in the southern state. The group also has a collaboration agreement with Cuckoo International (M) Sdn Bhd, the Southeast Asian unit of Cuckoo Electronics Co Ltd, to distribute LSK’s mattresses via the rental model to Cuckoo’s network.

It is noteworthy that LSK is still operating in a challenging market, similar to last year’s, but Lee is upbeat about a double-digit jump in revenue this year. He draws confidence, firstly, from the continuing recovery in export sales; secondly, the group’s aggressive sales activities in the B2C sub-segment of domestic sales; and thirdly, encouraging response from LSK’s 40:60 partnership with Cuckoo.

“[I’m counting on] the continuing recovery in export sales. We have planted the seeds by participating in international trade shows and market visits. We’ve gained new customers and the orders are coming in. And since launching two new products in our collaboration with Cuckoo, we have observed a year-on-year sales increase of 50% so far,” he iterates.

In a Feb 9 note, RHB Research points out that LSK is in a sturdy financial position with net cash of nine sen per share, a promising FY24F dividend yield of 6.8%, and an ex-cash price earnings ratio (PER) of about seven times.  Without rating the report, the research house gave LSK a fair value of RM1.42 based on a PER of 13 times on FY2024F earnings and +0.5 standard deviation from its five-year forward PER mean. It adds that the PER is at a 15% discount from the sector’s forward PER of 15.2 times, given LSK’s smaller size.

“This is justified, based on its anticipation of booking record-high earnings in FY23F and beyond,” says the research house.

South Korea is LSK’s biggest export market by revenue, followed by Europe, Japan and Australia. It also sells its mattresses in Singapore, China and Taiwan.

For the export markets, LSK is predominantly a supplier of latex bed components.

LSK has 16 showrooms, with 14 in the Klang Valley, one in Johor and another in Penang. According to Lee, each showroom brings in about RM500,000 in sales a month.

“The bulk of our domestic sales is derived from the Klang Valley, forming 70% of our local business. We continue to sell to the other states via roadshows, dealerships and our showrooms. Efforts to identify suitable locations outstation for showrooms are ongoing,” Lee says.

Competition is intense in the upper middle income segment that LSK targets. “This is why we have our own showrooms, as opposed to mattress players fighting for space in furniture shops in the past. Customers were not getting what they needed as salesmen obviously sold the beds that gave them the best commission. Opening our showrooms was challenging in the initial period but today our B2C segment makes up more than 70% of our domestic sales. By going direct, we save on distribution costs and this has increased our market share over the last five to seven years,” Lee explains.

LSK is now in the fourth year of its collaboration with Cuckoo and it expects the rental performance to surpass that of previous years as two new products strengthen market reach.

“Previously, the focus was on a single item. We have improved our product offerings this year by replacing the sole product with two others — one priced at a slightly higher and one at slightly lower price point — in order to capture the market better,” says Lee, adding that the Cuckoo-Napure partnership is set to grow the group’s recurring income with recognition to be spread over five years.

“The Cuckoo-Napure market we have now is predominantly Malay, which was previously hard to penetrate. But now with a rental framework with monthly instalments of about RM100, this works well for the customers. As of last year, we rented out 11,000 mattresses. This year, we are targeting about 17,000 pieces,” Lee says.

“Our best gross profit (GP) margins come from the B2C segment, coming in at an average of 60%, followed by Cuckoo-Napure (40%) and wholesale (30%). On a group basis, a combination of the different sales channels give us a blended GP margin of about 40%. With the ongoing momentum in domestic sales, I expect this figure to climb. In fact, net profit margin in FY2023 was about 10%. This year, we could hit 12%,” says Lee, explaining that the group kept “operations efficient so as to keep costs low”.

As the group’s two factories in Klang are running at 80% to 90% of their production capacity, LSK is exploring the acquisition of about five acres of land nearby for the construction of new facilities in preparation for higher orders. The existing factories have six production lines, including those for natural latex foam, polyurethane foam and various spring productions.

“Based on our forecast, our existing facilities will reach full capacity in two to three years’ time. Therefore, we have to start planning for future expansion now,” Lee explains.

When queried about LSK’s capex allocation for the potential acquisition, Lee says talks are ongoing with the other parties and nothing has been confirmed.

He explains that the acquisition of the land and construction of new facilities will be funded mostly with bank borrowings, with annual repayments not exceeding RM2 million. “Our old debts will be fully paid up within the year. The new facilities are a timely and necessary move for our business,” he rationalises.

As at Dec 31, 2023, LSK had net cash of RM21.02 million.

Lee, 48, joined LSK in 1997 and was appointed executive director in 2004 before taking the helm as MD in 2011. His father, Lee Ah Bah @ Lee Swee Kiat, 84, founded LSK in 1975, and is its executive chairperson.

As at March 22, 2023, Lee Swee Kiat & Sons Sdn Bhd — the private vehicle of the Lee family — owned a controlling stake of 55.76% in LSK.

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