LSK’s proposed acquisition of Italhouse seen positive

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PETALING JAYA: Natural latex bedding manufacturer Lee Swee Kiat Group Bhd’s (LSK) proposed acquisition of Johor-based Italhouse furniture retail chain is viewed as a positive, according to one research house.

In a recent report, CGS-CIMB said this was given the earnings accretion, potential synergies and expansion to LSK’s domestic retail presence that the acquisition will provide.

“Based on our back-of-the-envelope calculations, this proposed acquisition could lift our financial year 2019 (FY19) to FY21 earnings per share by 5.9% to 9.6%.

“This assumes only the sales contribution from the seven Italhouse outlets, without taking into account margin enhancement from intersegment sales of LSK’s own brand products to these outlets.

“Note that LSK currently supplies up to 50% to 55% of the products sold in Italhouse outlets, and the group aims to increase this to 90%,” said CGS-CIMB.

LSK, via its wholly owned subsidiary LSK Italhouse Sdn Bhd (LSKIH), had recently proposed to acquire the goodwill and assets of Italhouse from The Mattress House Sdn Bhd (TMH) and Amos Italsofa House Sdn Bhd (AIH) for RM6.95mil.

Concurrently, the sellers’ controlling shareholder Yeow Kian Ting will subscribe to a 30% stake in LSKIH, to be offset against 30% of the purchase price.

LSK will retain a 70% stake in LSKIH.

The effective acquisition cost of RM4.9mil will be fully-funded internally, which should not be an issue for LSK, given its net cash of RM10.8mil as of end March 2019.

As a result, LSK will obtain the existing business and all assets of seven Italhouse outlets and the ‘Italhouse’ trademark.

The proposed acquisition will allow LSK to strengthen its presence in the domestic bedding retail market through the increase in direct business-to-customer sales channels.

In addition, LSK will able to expand its presence in Johor where it currently has only one International Brands Gallery (IBG) outlet. According to CGS-CIMB, this will complement LSK’s existing outlets of eight IBG and five Mattress Factory Outlet stores that are mainly in the Klang Valley.

“The sellers gave a profit after tax guarantee of RM1mil for the first year of operation. We gather that the seven Italhouse outlets cumulatively generated RM9mil to RM10mil in revenue and RM700,000 to RM1mil in profit after tax in 2018,” said the outfit.

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