Kawan Food first half net profit below expectations

Potential re-rating catalysts for the stock include higher-than-expected revenue from the new factory and strong export market sales.

PETALING JAYA: Kawan Food Bhd’s net profit in the first half ended June 30 was below CIMB Research’s and Bloomberg’s consensus expectations at 32% of full-year forecasts, mainly due to weaker-than-expected export sales.

The research house yesterday cut the company’s FY17-18F earnings per share (EPS) to reflect a slower export sales outlook.

“We cut our FY17-18F EPS by 10.4%-17.8% to reflect weak export revenue and slight rise in raw material costs, but raise FY19F EPS rises by 1% as we expect stronger earnings from new factory,” CIMB Research said in its report.

“The stock has risen 24% year-to-date (YTD); current valuation not cheap at 20.4 times 2018F price-to-earnings.

“Downgrade from add to hold, first downgrade since our June 2015 initiation,” the research house added.

CIMB Research said the first half revenue rose 5.8% year-on-year (y-o-y) to RM102.6mil.

This was mainly driven by strong domestic revenue as export revenue growth was flat in H1’17.

“First half net profit rose by a higher 6.7% y-o-y to RM14.4mil as the company’s advertising expenses declined on-year.

“No interim dividends were declared, in line with our expectations,” it said.

CIMB Research said following Malaysia’s goods and services tax implementation in April 2015, Kawan’s domestic sales fell for two quarters.

“Since then, its domestic sales have been growing from strength to strength.

“We believe that due to higher inflation in the past few quarters, families are eating more at home, consuming more affordable products like Kawan’s roti paratha and chapatti,” it said.

CIMB Research said in the first half, export sales to Asia and Europe expanded while sales to the US and Oceania declined year-on-year.

Export revenue was flat in the first half.

“We understand there was a slowdown in orders from one of its distributors but the company is not too worried and expects orders from this distributor to catch up from H2’17 onwards.

“What was positive was the 20% on-quarter rise in the US revenue in Q2’17 to RM16.2mil,” it said.