It said the target price was higher as it rolled forward its price-earnings (P/E) valuation.
“We maintain our earnings per share (EPS) forecasts. As we are close to the year-end period, we are rolling forward our P/E valuation to 2018 20 times P/E (20% discount to our 25 times P/E target for food and beverage sector),” CIMB said.
“Our target price rises from RM3.50 to RM5.56. Potential re-rating catalyst for the stock include higher-than-expected revenue from the new factory and strong export market sales,” it said, adding that downside risks were weak domestic sales post GST implementation.
Kawan Food’s net profit rose to RM9.17mil in the second quarter ended June 30 compared with RM7.26mil in the same period last year. Its revenue was higher at RM55.5mil against RM44.28mil previously.
In the first six months to June 30, Kawan Food posted a net profit of RM13.54mil on revenue of RM97mil.
“At 41% of full-year forecast, Kawan’s 1H16 net profit is in-line with the market’s and our expectations as the second half is expected to be seasonally stronger,” CIMB said.
It noted that all markets, with the exception of Europe, experienced revenue growth in 1H16.
It said Malaysia remained its main revenue contributor with a 15.9% year-on-year sales growth in 1H16 suggesting that Kawan Food’s domestic business had recovered from the impact of the GST, which was implemented more than a year ago.
Kawan’s new factory, under construction in Pulau Indah, is on schedule. The new factory should be completed by October and commercial testing will begin thereafter. If all goes well, the new factory would start commercial production at the end of this year.
The new roti paratha line at the new factory would be three times the size of the current line. In addition, the new warehouse freezer would be 5-6 times larger than the existing warehouse.
“When the new factory is up and running, management is looking to penetrate the ready-to-eat (RTE) market. RTE products offer convenient meals and the company is targeting markets like convenience stores (e.g. 7-11 stores), kopitiams, small cafes and the airline industry,” it said.
The RTE products are generally half to three-quarters cooked, and an employee or customer would only need to heat them up in the microwave.