On track for record earnings in 2022F

■ We view LSK as a proxy to the recovery in consumer spending, backed by: i) higher mattress sales, ii) price hikes, and iii) higher economies of scale.
■ We expect LSK’s collaboration with Cuckoo Malaysia to propel its profitability to new heights going forward, with more marketing activities expected.
■ LSK’s valuation is undemanding at 5.5x CY23 P/E, an 81.6% discount to our discretionary consumer sector’s mean CY23 P/E. Reiterate Add.

Witnessing a rebound in local sales since 4Q21

Since the gradual lifting of lockdown measures starting Oct 21, LSK has been witnessing a strong rebound in sales in the local market. This is in tandem with the reopening of its retail outlets, as well as more large-scale furniture fairs and exhibitions being held. On top of that, we gather that LSK has seen a surge in mattress sales in areas affected by the recent floods. Supported by the price increases effective 1H21, we expect the higher sales to translate into margin expansion for the company from 4Q21 onwards.

Sales of A-series mattress in 2021 affected by lockdowns

While LSK aimed to sell 12,000 A-series mattresses (sold under LSK‘s collaboration with Cuckoo) in 2021F, sales likely fell short (estimated to reach only 7,000, which is in line with our estimates) due to the impact of various lockdowns throughout 2021. Nevertheless, we take comfort that sales in May 21 (prior to the implementation of a full movement control order [FMCO] in Jun-Sep 2021) was an encouraging 1.5k units.

Still optimistic on prospects of collaboration with Cuckoo

We remain optimistic about LSK’s collaboration with Cuckoo International. With the lifting of lockdown measures and supported by better consumer sentiment and more marketing activities, LSK is confident of achieving sales of 20,000 units (+185% yoy) in FY22F. In our view, the rental model (with low initial purchase cost) offered by Cuckoo-LSK when purchasing A-series mattresses could also be an attractive proposition to buyers amid the current subdued consumer sentiment. Note that LSK expects contributions from its collaboration with Cuckoo to contribute at least 20% of its turnover from FY22F onwards.

Net cash position will support attractive dividend yields in FY23-24F

As at end-3Q21, LSK has a net cash position of RM5.6m. With no major capex planned in FY22-23F (flat at RM3.5m for FY21-23F), we expect its robust balance sheet to support its dividend payouts (45% for FY21-23F). With an expected rebound in earnings, mainly in FY22-23F, this could translate into solid dividend yields of 2.9-8.3% for FY21-23F.

Reiterate our Add call

We make no changes to our FY22-24F EPS forecasts. We also keep our Add call and TP of RM1.84, based on 13x CY23 P/E, in line with its 5-year mean. We continue to like LSK for its: i) defensive business (resilient demand for beds); ii) attractive valuation (5.5x CY23F P/E); and iii) strong fundamentals (high ROE and net cash position). Re-rating catalyst: a spike in sales volume and higher-than-expected sales from its collaboration with Cuckoo.