Kawan Food first half earnings below forecast, downgraded to Hold

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

KUALA LUMPUR: Kawan Food’s net profit in the first half ended June 30, 2017 was below CIMB Equities Research and Bloomberg consensus expectations at 32% of full-year forecasts, mainly due to weaker-than-expected export sales.

The research house had on Monday cut the FY17-18F earnings per share (EPS) to reflect slower export sales outlook.

“The stock has risen 24% year-to-date (YTD); current valuation not cheap at 20.4 times 2018F price-to-earnings (P/E). Downgrade from Add to Hold, first downgrade since our June 2015 initiation,” said the research house. 

CIMB Research said the 1H17 revenue rose 5.8% on-year to RM102.6mil, mainly driven by strong domestic revenue as export revenue growth was flat in 1H17. 

“1H17 net profit rose by a higher 6.7% on-year to RM14.4mil as the company’s advertising expenses declined on-year in 1H17. No interim DPS was declared, in line with our expectations.  

Domestic division the star in 2Q 1H17 as domestic revenue rose an impressive 13.9% on-year to RM40.9mil. Even more impressive was the strong 26% on-quarter growth in 2Q17 domestic revenue to RM22.8mil,” it said. 

CIMB Research said following Malaysia's GST 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 1H17, export sales to Asia and Europe expanded while sales to the US and Oceania declined on-year. Overall in 1H17, export revenue was flat. 

It was disappointed to see the US revenue declining on-year in 1H17. 

“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 2H17 onwards. What was positive was the 20% on-quarter rise in the US revenue in 2Q17 to RM16.2mil,” it said.   

The research house also pointed out the testing and commissioning of Kawan's new factory in Pulau Indah, Selangor is still ongoing and the company expects commercial operations to start from early-4Q17. 

When ready, the new factory can produce three times more roti paratha and chapatti compared to its existing factory in Shah Alam. 

The factory would also have a line that cooks roti paratha, catering to the ready-to-eat (RTE) market segment, which provides convenience for consumers, with food that are packed for immediate consumption like nasi lemak, roti paratha and mee hoon.  

“The RTE market has huge potential and Kawan is looking to penetrate this market in a big way. Markets it is looking to target includes convenience stores, the airline industry, cafes and restaurants. 

“We understand that negotiations are already ongoing with a few major airline caterers for Kawan to provide them its food products once the new factory starts commercial operations,” said CIMB Research.
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