Company expects sales to recover after GST bump
MAKER of latex mattresses Lee Swee Kiat Group Bhd (LSK) expects to resume its growth trajectory in the second half of the year.
Listed on the Main Market of the Bursa Malaysia, LSK was impacted by the implementation of the Goods and Services tax (GST) in April but its sales had recovered in July.
“After the implementation of the GST, our local sales had been impacted but last month we had seen some recovery. It is still too early to tell for August. But overall, in other countries’ experience with GST, I believe it will take at least six months to recover to pre-GST levels,” LSK managing director Eric Lee tells StarBizWeek.
Its shares had seen some interest from the market of late due to the exports exposure it has today.
LSK’s shares with a market capitalisation of RM53.7mil have risen by a staggering 94% in the year-to-date period. It is now trading at an average price to earnings ratio of 11 times with no forward guidance estimates.
“About 60% of our revenues are derived from exports while the rest are sourced locally. We usually hedge forward to a certain extent but with the uncertainty over the past few months with the controversy and uncertainty affecting the ringgit, we don’t hedge too much now so that it will be beneficial to our bottomline,” Lee says.
South Korea is LSK’s biggest export market which the company had been seeing growing demand from. The company’s other export markets include Japan, Australia, Belgium, Canada and The Nertherlands.
To help offset the uncertainty when dealing with exports, the company also employs a natural hedging strategy.
“We price our products and purchase in the same currency. Say we sell in US dollars we also buy in US dollars in turn. While excess of US dollars will be parked in a dedicated US dollar account and this is beneficial to the bottomline once it is converted back to ringgit,” Lee says.
LSK, which is also a proxy and indicator to the property market, has seen a strong performance in the financial year 2014 ended Dec 31 despite the year being a tough one for it.
“It was a difficult year which saw the onslaught of various hikes in costs. The implementation of minimum wages that came into effect from January 2014, coupled with the double digit hike in electricity and energy costs had exerted much pressure on our overheads,” LSK chairman Lee Swee Kiat says in its annual report.
“Nevertheless, we were able to weather through the challenges with strong growth in sales, better sales mix and tight cost control that allowed us to register a three fold increase in net profit for the year,” Swee Kiat adds. After four years of relatively benign and flat growth performance for both top and bottomlines from FY10 to FY13, the company surprised investors in FY14.
In FY14, LSK’s earnings per share jumped 198.3% to 2.44 sen per share while revenues jumped 19.4%.
The strong growth was attributed to a broad-based increase in volume in both the export and domestic markets; and a ‘favourable’ foreign exchange rate.
The company today operates in the sweet spot of being a beneficiary of lower latex prices which it purchases in the US dollars and also benefits from foreign appetite for Malaysian exports on the weak ringgit.
Planning for future growth
Lee says LSK is planning ahead to tap future growth in an industry that is fraught with competition.
“We are still on an expansion mode of our operations. We plan to add 30% to our capacity as we are running at full capacity now for latex foam (mattress) production,” Lee says.
“We will install a new production line that will be different and improved with more automation. This will reduce our reliance on labour costs which are increasing. I think also minimum wages will soon be revised in Malaysia,” he adds.
The expansion, which would be funded internally, is expected to help its target of delivering single digit growth in its turnover and earnings for shareholders.
“We are allocating about RM4mil in capital expenditure for FY15 and FY16,” Lee says.
The company also does not have a dividend policy at the moment.
LSK says it is also open to the idea for mergers and acquisitions if there may be one.
In the meantime, the company will focus on its core competencies in hopes of being able to deliver for its customers and shareholders. It is building up its brandname with the opening of more retail chain outlets called the International Brands Gallery (IBG) to showcase its products.
“We are looking for suitable location now to expand the IBG from the ten we have now. We hope to open more in the years to come,” Lee says.
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