Kawan Food (Kawan) reported a headline net profit growth of 129.8% YoY in FY20 to RM28m. The stronger set of results was predominately driven by the increase in sales from both local and export markets. After adjusting for one-off items and forex loss, Kawan’s full-year FY20 core net profit came in at RM30.9m. The results were within both our and consensus estimates at 98.7% and 98.2% respectively. We are still positive on Kawan’s future prospects as we believe that its growth will be supported by the change in consumer’s preference towards frozen and convenient food, complementing the fast-paced modern lifestyle. We maintain our Outperform call and TP of RM2.80 based on a PE multiple of 25x to its FY21F EPS. On a side note, Kawan declared an interim dividend of 3sen, bringing the total dividends declared for FY20 to 5.5sen.

• 4QFY20 revenue increased by 7.4% YoY to RM60.6m, mainly due to the growth in sales volume, especially in the Malaysian market. We attribute the sales growth to the enforcement of Conditional Movement Control Order (CMCO) in October given the rising Covid-19 cases locally. On a QoQ basis, revenue slipped by 0.9% QoQ as the group was affected by the shortage in shipping containers which led to a delay in export shipments. We understand that the container shortage issue has been resolved and the group is currently scaling up its production in order to fulfill the orders that were affected previously.

• 4QFY20 net profit grew by 30.9% YoY to RM6.4m due to higher sales volume and production efficiency on the back of better economies of scale and automation. Despite recording lower revenue, Kawan’s net profit increased by 3.9% QoQ, attributable to the improvement in production efficiency.

• Outlook. We remain positive on Kawan’s outlook moving forward, mainly underpinned by the robust demand for frozen food due to the change in consumer preference towards frozen food that offers convenience solutions. In addition, we think that Kawan’s future growth will also be driven by new product launches as well as new exports markets. Meanwhile, the on-going cost optimsation strategies, such as upgrading equipment and automation to enhance production efficiency, and the installation of solar panel system should lead to lower operating cost, thus improving its profit margins.

Source: PublicInvest Research - 19 Feb 2021