Kawan Food recently hosted a virtual investor briefing and we came away feeling reaffirmed on the group’s future prospects. This is mainly underpinned by the strong backlog orders and the growing demand for frozen food from its local and overseas clients. In addition, Kawan’s future growth plans include introducing new products and penetrating into new export markets. Furthermore, we believe that as Kawan ramps up on its utilisation, it should likely lead to better profit margins given the better production efficiency via higher economies of scale. As such, we maintain our Outperform call on Kawan, with an unchanged TP of RM2.75 based on a 25x PER FY22 EPS.
- Expecting a ramp up in production to improve utilisation. The 2 week closure (14th to 28th June 2021) and the workforce restrictions from stricter lockdown orders saw Kawan’s utilisation rate declined to 45-55% (1QFY21: 55-60%). As a result, there has been a backlog in orders from both Kawan’s local and overseas customers. Note that Kawan has managed to secure vaccines for its staff and has resumed its production at full capacity on 16th August 2021. Going forward, given the strong order backlog and the robust demand from both local and overseas clients, we are expecting Kawan’s utilisation to rise to 60-65%.
- Robust demand in local and export markets. Moving forward, we believe that demand for Kawan’s products will continue to be strong, as popularity for frozen food has increased, fuelled by the change in consumer consumption behavior thanks to the Covid-19 pandemic. Despite the disruption in production facilities, there were no order cancellations and Kawan has managed to capture additional 3-5% market share in the domestic market. Note that Kawan’s market share was at c.60% before the Covid-19 pandemic.
- New products and export market to drive growth. Kawan continues to focus on expanding its geographical footprint and has managed to penetrate into South America, a new market which is expected contribute positively in 4QFY21. While the manpower constraint previously has limited Kawan’s production for its new products (ie: Pizza, Malabar Roti), the group has managed to secure new workers and is looking to gradually increase its headcount to 410 from c.300 going forward. This should enable Kawan to ramp up its production for the new products given the positive response among the local consumers.
- Focusing on streamlining operations. Although raw material prices have increased (wheat and sugar prices have increased by c.8% and c.21% YTD respectively), Kawan remains committed on improving its operation efficiencies to cushion the impact from the rising raw material cost. We understand that the group is embracing industry 4.0 and has embarked onto several digitalization transformation projects to increase production efficiency, reduce wastage and reliance on manpower.
Source: PublicInvest Research - 13 Sept 2021