We came away from Kawan Food’s (Kawan) virtual investor briefing feeling positive on the group’s future outlook as we gather that the demand for frozen food is still robust, driven by the higher in-house food consumption. Furthermore, Kawan is also looking to grow its export sales by penetrating new export markets. While the temporary closure of its Malaysia operations due to Covid-19 outbreak could negatively impact Kawan, we believe that the impact on earnings will be minimal, given that Kawan is able to increase its production in Nantong, China or extend shifts upon re-commencement of its Pulau Indah operations. We maintain our Outperform call, with an unchanged TP of RM3.00 based on a 25x PER on its FY22F EPS.

• Expecting higher sales going forward. We gather that demand for frozen food is still robust especially in Malaysia, thanks to the tightening of Movement Control Order (MCO) restrictions which encourages consumers to stock up on frozen food. In addition, we expect its exports to rise in tandem with Kawan’s strategy in penetrating new export markets. We understand that the group is seeking to grow its presence in North America, South America and Europe.

• E-commerce sales gaining traction. Following the tightening of MCO restrictions, e-commerce sales have grown by 30-40% in the past 2 months albeit from a small base (c.1% of FY20 sales). Nevertheless, management remains committed to grow the segment with ongoing plans to increase distribution points in Ipoh and Penang.

• Not just a stay-at-home play. The Hotel, Restaurants and Café (Horeca) segment is expected to be one of the key development areas post pandemic. The group is actively engaged in R&D activities to launch new products (ie: Pizzas, precooked meals and greek pita) to capture a wide range of consumer preferences. Note that Horeca accounts for c.5% of Kawan’s revenue in FY20 (pre-Covid contribution was c.10-15%).

• Cost optimization to mitigate the rising raw material prices. Kawan remains committed to higher economies of scale and cost optimization to mitigate the impact of the higher raw material prices (45-50% of product cost). The group has completed the installation of the solar panels in 1QFY21, and is expected to provide a cost savings of c.RM1m per year.

• Temporary closure impact to be minimal. A one-week closure from 14th to 21st June 2021 is unlikely to have a material impact on Kawan’s earnings, given that the group has sufficient inventory and will be able to increase production with extended shifts upon re-commencement or diverting its production to its manufacturing base in China. We estimate that for every one week’s closure, Kawan earnings would fall by c.2%.

Source: PublicInvest Research - 17 Jun 2021