Kawan Food Berhad (Kawan) is predominantly involved in the manufacturing of frozen food products and is the largest frozen paratha manufacturer in Malaysia with 40 years’ of experience in food manufacturing. The group manufactures frozen food products to cater for both local and export market. We forecast a 3- year earnings CAGR of 59% on the back of the capacity expansion and growing demand for frozen food. We believe this will be supported by the changing consumer’s preference towards frozen and convenient food and coupled with the Covid-19 outbreak, demand for longer shelf life food items are in favour. We initiate coverage on Kawan with an Outperform call and a TP of RM2.80, which suggests a potential upside of 35.9%. We derive our TP based on a PE multiple of 25x on its FY21F EPS.

• An established frozen food manufacturer. Initially starting as a small scale family owned business, Kawan have since expanded to become one of Malaysia’s leading frozen food manufacturers with manufacturing bases in Pulau Indah, and Nantong, China. The group mainly focuses on frozen Asian food products, namely Paratha and Chapatti. Currently, its products are exported to 36 countries with US, UAE and UK being the major export markets.

• Projecting strong earnings growth. Given the increasingly hectic lifestyles, there has been an increase in consumer preference towards frozen food that offers convenience. According to Grand View Research, global frozen food market is projected to grow at a CAGR of 3.4% from 2019 to 2027 to USD380.5bn. As the group is currently operating at 60-65% utilization rate, we believe that Kawan is poised to capture the demand growth given the ample additional production capacity. In addition, we are of the view that as consumers are slowly adopting to the new normal (ie: stay at home) to curb the spread of the Coronavirus pandemic, demand for frozen food will be sustainable going forward, likely to be driven by the increase in sales to retailers and e-commerce platforms. As such, we are projecting a 3-year earnings CAGR of 59% for Kawan Food.

• Initiate with an Outperform call. We are initiating coverage on Kawan Food with an Outperform rating and a target price of RM2.80. We derive our 12- month target price for Kawan by pegging a P/E multiple of 25x (-0.5SD of Kawan’s 5-year historical average) to its FY21F EPS. We believe the valuation ascribed as fair considering the 3-year earnings CAGR of 59% given the change in consumption habits towards Ready-to-Eat (RTE) food, especially among the young working adults and millennials who value convenience that are expected to drive the demand for frozen food globally.

Source: PublicInvest Research - 13 Jan 2021