Potential re-rating catalysts for the stock include higher-than-expected revenue from the new factory and strong export market sales.
KUALA LUMPUR: CIMB Equities Research retains its Add recommendation on Kawan Food with the US dollar in play due to its strong export sales.
The research house said on Monday at 78% of its full-year forecast, Kawan's 9M16 net profit was above market and its expectations, mainly due to stronger-than-expected sales.
The consumer product company also had RM68mil net cash or 25 sen net cash per share as at end-September.
“The US and domestic market contributed 71% of 9M16’s revenue. US and domestic sales up 23.1% and 13.3%, respectively. Targeting ready-to-eat markets once new plant starts commercial operations,” it said.
CIMB Research said Kawan’s 9M16 revenue was up 15.6% on-year mainly due to strong export sales, particularly to the US.
The 9M16 net profit growth was only 3.2% on-year higher at RM15.8mil. The weak 9M16 profit growth was mainly due to a RM6.5mil forex gain in 9M15 compared to a RM900,000 forex loss in 9M16.
“If we strip out forex gains, 9M16 net profit would be 44% on-year higher,” it said.
The research house said the current strong US$ against the Malaysian ringgit augurs well for the company. More than 60% of 9M16 sales was from exports and most of the exports are priced in US$.
“Based on our sensitivity analysis, for every 1% depreciation of the RM-US$ exchange rate, Kawan’s EPS would rise by 2.7%. Average 2Q16 RM-US% exchange rate was RM4.01 compared to RM4.05 in 3Q. In 4Q16 so far, the average rate is RM4.22, a huge on-quarter increase,” it said.
CIMB Research noted that the construction of Kawan’s new Pulau Indah factory has been completed. Commercial testing is ongoing and the new factory is targeted to start commercial production at the end of this year.
The new warehouse freezer would be between fiuve and six times larger than the existing warehouse and part of the new warehouse would be rented out to external parties as Kawan does not need the whole warehouse space, at least for now.
“With the new factory in operations, the company is targeting a new market, the ready-to-eat (RTE) market. RTE products offer convenience to consumers and Kawan is looking to sell to cafes, kopitiams, convenience stores and also the airline industry. The RTE products only need to be heated up in the microwave.
“Kawan’s net cash balance sheet was at RM68m or 25 sen net cash per share as at end-September. In 9M16, the company raised RM55.8mil from the conversion of outstanding warrants, which expired in July 2016. The funds helped to finance the company’s capex.
“In 9M16, Kawan’s capex was RM44mil. With most of the capex for the new plant already completed, its net cash could be used to fund its working capital in 2017.
“We raise our FY16 EPS forecast by 15.3% to take into account a likely stronger net profit in 4Q16, in view of the stronger US$ in this quarter. Our target price remains unchanged at 20 times 2018 P/E (20% discount to our 25 times 2018 P/E target for the F&B sector).
“Potential re-rating catalysts for the stock include higher-than-expected revenue from the new factory and strong export market sales. Downside risks are weak domestic sales,” it said.
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