Kawan Food’s (Kawan) core net profit grew by 34.5% YoY in 1QFY21 to RM7.5m, mainly due to the stronger sales in the US and domestic market. However, results were below both our and consensus estimates, accounting for 19% and 18% of our and consensus estimates respectively. The discrepancy in our forecast was mainly due to higher-than-expected production cost. We are adjusting our FY21F earnings forecast downwards by 9% to account for the impact of MCO 3.0 where Kawan is only allowed to operate at 60% capacity. In addition, we are also raising our operating cost assumptions for FY21-23F to factor in the higher wheat and sugar prices. As such, our FY21-23F earnings forecast are reduced by an average of 6.4%. We are still positive on Kawan’s future prospects driven by new product launches as well as new export markets. We maintain our Outperform call based on a 25x PER and a higher TP of RM3.00 as we roll forward our valuation base year to FY22F EPS.

• 1QFY21 revenue increased by 21.8% YoY to RM65.3m, mainly due to the growth in sales volume from the US and Malaysian market. On a QoQ basis, revenue grew by 7.8% also due to the rising demand in the US and local market. 1QFY21 net profit grew by 24% YoY to RM8.2m, on the back of higher sales volume and lower administrative expenses. Meanwhile, Kawan’s net profit jumped by 31.6%, likely attributable to the better economies of scale.

• Outlook. We expect Kawan’s Horeca (Hotels, Restaurants and Café) segment to be negatively impacted given the slower-than-expected economic recovery following the rise in Covid-19 cases. Note that Horeca accounts for c.5% of Kawan’s revenue in FY20. However, we think that the decline in Horeca sales could be mitigated by the growth in e-commerce sales and the boost in domestic sales due to higher food consumption at home. In addition, with the on-going roll-out of the global vaccination program, we believe this could bode well with Kawan’s strategy to penetrate into new export markets to increase the utilisation of its Pulau Indah plant. We understand that Kawan is not looking to increase ASP in order to maintain its market share, but however remains committed to higher economies of scale and continuous cost optimisation efforts to mitigate the rise in raw material costs.

Source: PublicInvest Research - 1 Jun 2021