Kawan Food on a roll with strong US dollar

WHILE the after-effects of recession in 2010 had left many fast-moving consumer goods (FMCG) companies hurt and looking for ways to cut costs, the weaker ringgit against the US dollar is certainly proving to be exciting for food manufacturer Kawan Food Bhd.

The strength of the US dollar is somewhat stirring up investors’ craving for the frozen food producer that exports most of its products with sales mostly denominated in the currency.

Since the lowest closing price on Sept 21 at RM2.37, the company’s share price surged 24.5% to close at RM2.95 yesterday. The company is worth RM607mil now.

The clear trend forward in the FMCG sector is consolidation and we have witnessed this when confectionery player London Biscuits (LonBisco) acquired a 32% stake in loss-making TPC Plus Bhd for RM7.68mil in 2010 and 20% stake in Lay Hong Bhd in 2006.

Back then, TPC’s egg production capacity very much suited LonBisco’s needs in every way that included the nutritional content of the end product plus the latter’s distribution channels.

Other eminent deals in the industry also include Carlsberg Malaysia’s acquisition of Carlsberg Singapore in 2009 followed by US based Kraft Foods US$19.5bil takeover of Cadbury in 2010.

Earlier in June, we saw two buyout offers of snacks and candy manufacturer Cocoaland Holdings Bhd from Hong Kong-listed First Pacific Co Ltd and the other from private equity firm Navis Asia V11 Management Co Ltd. The offer from Navis was rejected unanimously by Cocoaland’s board.

Kawan Food is perhaps one that has yet to see any acquisition plans for now, except for its plans to consolidate its operations under its new plant located at the Selangor halal hub in Pulau Indah, Port Klang.

The company, whose speciality range from frozen roti paratha to chapatti and spring roll pastry under the Kawan, KG Pastry, Veat and Passion Bake brands is set to see business expansion with its new 15-acre facility, slated to be up and running by the end of the first quarter of 2016.

The facility is said to be five to six times bigger than the existing freezer warehouse facilities in Section 15 and Section 16, Shah Alam.

With the consolidation in the pipeline, it’s obvious that the company is gearing towards managing cost efficiently with the increased capacities in the new facility. Either way, it will inevitably pave way for business growth across the shore and the local market.

Kawan Food booked the best ever performance in its third quarter ended Sept 30, 2015 results, on higher export sales from North America, Oceania and other regions in Asia, except Malaysia.

It posted a 112% surge in net profit to RM12.26mil from RM5.77mil in the corresponding period a year ago, against a revenue that climbed 13% to RM43.21mil.

Basic earnings per share improved to 6.39 sen from 3.18 sen. No dividend was declared for the quarter under review.

For the nine months period, net profit was up 63% to RM25.09mil, while revenue rose 10% to RM124.84mil.

Earnings per share was 13.07 sen from 8.46 sen.

The favourable exchange rate and trends in most of the raw materials used during the period had resulted in a 114% hike in profit after taxation or RM6.6mil compared to the corresponding period a year ago.

The group recently launched tortillas, a flatbread that is starting to see demand worldwide. This is seen to be part of its game plan to build the European market business over medium to long term.

According to CIMB Research, the domestic market was the largest revenue contributor in the nine-month period, but revenue inched down 0.9% year-on-year (y-o-y).

Analyst Nigel Foo says although Kawan Foo’s nine-month net profit results were above expectations, this was one of the rare occasions where the company’s revenue slid.

North America, the second largest market saw higher sales that rose 20% y-o-y to RM39.9mil in the nine months, while Europe posted the fastest growth during the period, with a 24% increase in sales y-o-y.

In keeping its “add” call on the stock, CIMB Research raised its financial year 2015 to 2016 earnings per share by 14% to 37% to reflect foreign exchange gains and lower raw material costs, with target price-to-earnings (PE) basis unchanged at 20 times, a 25% discount to its food and beverage sector PE of 25 times.

Notably Kawan Food is in a net cash position with cash and cash equivalents of close to RM40mil and debt of RM6mil as at Sept 30, 2015.

The cash pile and proceeds from warrants of RM20mil accumulated in the nine months of 2015 should help fund most of the new facility’s capital expenditure, says Foo.

Notwithstanding, Kawan Food is backed by a strong management team.

The company is controlled by executive chairman Gan Thiam Chai and his family with 39.02% stake.

Gan, 61, has 30 years of experience in the food processing industry, while non-independent non-executive director Nareshchandra Gordhandas Nagrecha, 64, is also well-versed in the food sector, as he jointly owns Canada incorporated Rubicon Food Products Ltd that produces and distributes the Rubicon range of drinks as well as imports and distributes Shana range of frozen vegetables and flat bread to North America.