Kawan Food’s (Kawan) 3QFY21 net profit grew by 26% YoY to RM7.8m, mainly driven by stronger domestic sales. After adjusting for one-off items, Kawan’s 3QFY21 core net profit came in at RM7.9m. Cumulative 9MFY21 core net profit of RM21.9m were below our and consensus forecasts, accounting for 66% of our full-year estimates. The discrepancy in our forecasts was mainly due to the weaker-than-expected export sales, which was affected by the global supply shortage of container. We lower our FY21-23F forecast by 3-8%, mainly to account for higher raw material costs and weaker export sales. We are still positive on Kawan’s future prospects driven by new products and export market, the strong backlog orders, as well as the growing demand for frozen food. Our Outperform call on Kawan is maintained with a lower TP of RM2.60 (previously RM2.75) based on a 25x PER FY22F EPS.

• 3QFY21 revenue grew by 4.7% YoY to RM64m, driven by stronger domestic sales. Sales in Malaysia increased by 61.4% YoY to RM34.3m. However, the growth in local sales was partially offset by lower export sales (-25.4% YoY) due to the impact of global container shortages which resulted in deferment of shipments. We gather that despite the container shortages, the group has not seen any cancellation of orders from its export customers.

• Net profit grew by 26% YoY to RM7.8m, despite recording smaller sales growth. This was likely attributable to the group’s on-going cost optimisation efforts which saw an improvement in its net profit margin (3QFY21: 12.1% vs 3QFY20: 10.1%).

• Outlook. Although the rise in raw material prices will affect Kawan’s margins, the group plans to mitigate the higher cost by improving its operational efficiencies via its on-going automation efforts and greater cost control (previously installed rooftop solar system). Following the easing in restrictions, we believe that the Hotel, Restaurant and Café (Horeca) segment will be one of the key development areas going forward. Kawan has been actively involved in R&D activities to launch new products in order to capture a wide range of consumer preference. Note that Horeca accounts for c.5% sales in FY20 (pre-covid contribution was c.10-15%).

Source: PublicInvest Research - 18 Nov 2021