The research house said on Monday the TP was based on 2020F price-to-earnings (P/E) of 17.5times, which is at 30% discount (previously 20%) to its 25 times P/E target for the food and beverage (F&B) sector.
“The larger discount is to reflect Kawan's small market cap. We like the stock as we anticipate 76% EPS growth in 2019F, driven by higher export sales and strong US$/RM exchange rate, and that it trades at an attractive 13.8 times 2019F P/E, below the sector's average of 25.6 times.
“Strong export revenue, especially from the US, is a potential re-rating catalyst. Downside risks are rise in raw material prices and weak export sales to the US,” it said.
To recap, CIMB Research organised a site visit for 20 institutional fund managers to Kawan Food's new factory in Pulau Indah, Selangor.
After a delay of more than 18 months, the new factory (which will have a roti paratha and chapati production capacity triple that of its existing factory in Shah Alam) finally started commercial production in July 2018.
Kawan has already moved existing production lines from its old factory to the new plant. It is adding a brand new line, which has an output three times that of an existing line.
“The new line still being commissioned; slated to be completed in the next one to two months. The old factory had been operating at full capacity over the past two years, resulting in flattish revenue for Kawan Food.
“We understand from management that since the new factory started commercial operations in July, foreign F&B companies have been in talks with Kawan Food for it to produce products for sale outside of Malaysia.
“We view this positively as the market recognises Kawan Food’s management and its product quality. We believe Kawan Food could start OEM manufacturing for some foreign F&B companies from 2019F onwards,” it said.
Currently, exports account for around 60% of its group revenue. Kawan Food plans to start selling its snacks (mainly rice-based) in retail stores from 1Q19 onwards.