Kawan Food’s (Kawan) 4QFY21 net profit increased by 57.6% YoY, to RM10.1m, mainly due to the increase in sales and lower marketing expenses. After adjusting for exceptional items, Kawan’s 4QFY21 core net profit came in at RM8.8m, bringing its full-year FY21 core net profit to RM30.7m. Results were in-line with our but below consensus expectations, accounting for 101% and 93% respectively. We expect Kawan to continue its growth trajectory, underpinned by the rising demand for frozen food and a potential improvement in margins, on the back of adjustment in selling prices and greater economies of scale. Additionally, we think that Kawan’s stock valuation looks attractive given that Kawan is currently trading at 16x PER, which is near -1SD of its 5-year historical average (see Figure 1). All told, we maintain our Outperform call on Kawan with an unchanged TP of RM2.60 based on a 25x FY22F EPS. On a side note, Kawan declared a single tier interim dividend of 3 sen.

• 4QFY21 revenue grew by 11.2% YoY to RM67.4m, driven by the stronger sales from both local and overseas markets. We gather that the easing in Covid-19 SOPs since Oct 2021 did not affect demand locally, on the contrary, sales in Malaysia increased by +4.0% YoY due to the expansion of customer base in the mini market supply chain. Meanwhile, export sales rose by 17.4% YoY given the stronger sales from the US and Asia region.

• 4QFY21 core net profit increased by 4.5% YoY to RM8.8m, due to the higher production efficiency from greater economies of scale and lower sales promotion expenses. As such, Kawan’s PBT margin improved to 17% from 11% in 4QFY20. In 4QFY21, Kawan’s utilisation rate increased to 60% from 55% in 3QFY21.

• Outlook. We reiterate our positive view on Kawan on the back of a stronger demand for frozen food. Local sales have remained strong as the group continues to expand its customer base. Furthermore, we think that the Hotels, Restaurant and Café (Horeca) segment will be one of the key drivers going forward, benefitting from the easing in economic restrictions. As for exports, we continue to expect greater contributions as we understand that Kawan has managed to secure new clients in North America, Kawan’s biggest export market. Several clients that had opted to delay shipments owing to the elevated shipping cost previously have also resumed its shipments. In order to mitigate the rising raw material cost, Kawan has adjusted its selling prices from Feb 2022 onwards. Additionally, we opine that the increase in production output will be supported by the group’s ongoing efforts to increase its manpower, which should translate to higher economies of scale.

Source: PublicInvest Research - 1 Mar 2022