LSK aims to double sales by 2020 with MFO in its stable

Lee Swee Kiat (LSK) Group Berhad managing director Eric Lee will the range of Napure Mattresses.

PETALING JAYA: Banking on its niche as a natural latex bedding manufacturer, Lee Swee Kiat Group Bhd (LSK) is embarking on the next phase of growth with its proposed acquisition of Mattress Factory Outlet (MFO).

The group aims to double its sales by 2020, according to LSK managing director Datuk Eric Lee.

LSK achieved sales of RM75mil during the financial year ended Dec 31, 2017 (FY17).

Lee told StarBiz that the group targets to grow its sales to RM150mil by 2020.

“This will be achieved via a two-pronged approach of domestic and foreign sales. Following the recent abolition of the goods and services tax (GST), we expect this to drive consumer spending, which should in turn grow our domestic sales significantly this year,” he said adding that the group was focusing on the Asean market, with a vision to be the leading latex manufacturer in the region.

An estimated 55% of LSK’s products are exported.

LSK manufactures bedding products, operating as a niche player focusing on 100% natural latex mattresses.

Lee said high technical expertise is required to produce 100% natural latex mattresses.

Currently, countries that can master the production of natural latex products are Malaysia, Thailand, Sri Lanka and Vietnam, which have accessibility to the raw material as freshness is a determinant of latex quality.

Bedding products make up more than 95% of the group’s total turnover and are marketed under the Napure, Englander, and Tempur brands.

LSK is the exclusive distributor for Tempur, while the Englander trademark for the Asean region was acquired in 2015 for US$1.25mil.

Apart from that, LSK produces semi-finished products like latex foam, which is mainly sold to export markets.

The group also owns a chain of eight International Brands Gallery (IBG) outlets.

LSK has two factories in Klang, which has a total built-up area of 300,000 sq ft and six manufacturing lines.

On an annual basis, the group’s production capacity of latex foam stands at 6,000 tonnes.

Lee said that the group’s operations were previously quite reliant on foreign workers.

However, the group is working towards increasing automation in its operations.

“We are in talks with several parties, some of which are top automation companies in the world, and exploring robotic arms.

“We have two years to improve on our system to adopt Industry 4.0 practices, to cater to our expansion plan beyond 2020.

“It is more challenging to adopt higher levels of automation as our products are bulky and production lines are not as straightforward as compared with glove production,” he says. LSK registered a net profit of RM6.03mil in FY17, a 15% increase as compared with the previous financial year.

The group has net cash of RM8.15mil.

The stock is trading at a price-earnings multiple of 24.67 times, with a market capitalisation of RM146mil.

Last month, LSK adopted a dividend payout policy of not less than 30% of its consolidated net profit from FY17 onwards, to be paid out in the form of cash or share dividend.

Although bedding products are considered as furniture, LSK’s business differs from furniture makers like Latitude Tree Holdings Bhd, Lii Hen Industries Bhd, and Poh Huat Resources Holdings Bhd.

This is because the furniture makers produce wood-based furniture, with timber as its major raw material.

The main composition of LSK’s products is natural latex, which make up some 55% of LSK’s total cost.

Most wood-based furniture makers export their products or sell them to distributors.

As for LSK, the group has its own direct sales channel via its IBG stores, apart from resellers like Harvey Norman.

Currently, local business to consumer (B2C) sales make up 60% to 70% of LSK’s total sales.

By going directly to the end users, LSK is able to control its branding, marketing as well as improve its cash flow.

CIMB Research, in an initiation report, said that the recent decline in natural latex prices is a boon to LSK.

“Although LSK does pass on cost savings to its customers by lowering its selling prices, we believe it can benefit from arbitrage opportunities from the time lag in adjusting its selling prices, which may vary between one and six months, depending on volatility.

“Currently, we assume natural latex prices of RM5.25 per kg for FY18 to FY20.

“Based on our estimates, every 5% decrease in latex price will increase LSK’s FY18 to FY20 earnings per share (EPS) by 3.7% to 4.5%.

“This is assuming that LSK does not pass on any cost savings from the decline in raw material prices,” says CIMB Research.

LSK competes on an equal footing in the market as the industry it operates in is not a recipient of government subsidies, according to Lee.

“Branding and efficiency is very important, and we always try to benchmark the company against the latex glove industry,” he says.

Outlet concept stores

The Main Market-listed company is making a foray into the outlet concept retail segment, following the proposed acquisition of five outlets and retail trademark of Mattress Factory Outlet (MFO) for a total cash consideration of RM2.78mil.

The acquisition was based on willing buyer and willing seller negotiation, after taking into consideration the value of showroom fittings of RM1.53mil and trademark value of RM1.25mil.

MFO is a 23-year-old trademark in the marketing and distribution of bedding products targeting middle-income consumers.

According to a filing with Bursa Malaysia, LSK will acquire goodwill, assets, and business intellectual property rights of MFO Sdn Bhd.

Barring any unforeseen circumstances, the acquisition is expected to be completed in two weeks.

MFO stores are different from LSK’s self-own chain of IBG outlets as IBG stores are boutiques, while MFO stores are outlet concept stores.

Lee explained that IBG stores sells LSK’s own brands, at a product price range of RM3,000 to RM8,000, targeted at higher income customers.

On the other hand, MFO outlets carry MFO’s brand Dorma, as well as third-party brands such as Kingkoil, Goodnite, and Dreamland.

Competitive price range

“Going forward, we plan to design bedding products with a competitive pricing range of RM1,000 to RM4,000 under our own brands Napure and Englander, to be sold in MFO outlets,” said Lee.

In 2017, the five MFO outlets generated a cumulative revenue of RM10mil and a net profit of RM1mil.

Based on the figures, Lee expected MFO to contribute at least RM1mil to RM2mil net profit to LSK annually.

Lee said that the proposed acquisition was in line with the group’s strategy to grow its B2C segment and increase its retail sales.

“By doing so, we get to move our products directly to the customers, offering greater value and more competitive pricing.

“It is a good fit for us, as we did not supply our products to this chain previously.

“As such, we will be ramping up our advertising and promotional (A&P) activities for the B2C segment, particularly investing more on marketing,” he says.

The average allocation for A&P activities is RM1mil per year.

Lee added that the group was also working to secure a strong e-commerce partner to enter the e-commerce space.

According to a report by CIMB Research, the proposed acquisition could increase LSK’s forecast earnings per share for financial year 2018 to 2020 by 8.3% to 16.6%.

“This is assuming sales contribution from the five MFO outlets, without taking into account margin enhancement from intersegment sales of LSK’s own brand products to these outlets.

“LSK does not supply any of its products to MFO outlets,” says CIMB Research.

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