Kawan Food’s (Kawan) 1QFY22 core net profit grew by 15.1% YoY to RM8.6m, mainly driven by stronger sales and lower selling and distribution expenses. Results were in line with our and consensus expectations, accounting for 23.1% and 20.3% respectively. We are still positive on Kawan’s future outlook, underpinned by strong demand for frozen food products and greater production efficiency to mitigate the impact on the rising raw material prices. Meanwhile, we think that Kawan’s valuation looks undemanding, as it is currently trading at a PE of 16x, (which is near -1SD of its 3-year historical average (see Figure 1). We tweak our earnings by an average of 1% for FY22-24F due to housekeeping changes. Our Outperform call on Kawan is maintained, with a lower TP of RM2.50 (from RM2.60) however, as we lower our PE multiple to 20x (in line with its 3-year historical average PE) from 25x. We also roll forward our valuation base year to FY23F EPS.

• 1QFY22 revenue grew by 5.1% YoY to RM68.7m, due to stronger sales from local and export markets. Malaysia sales increased by 9.6% YoY to RM32.1m, mainly attributable to the new clients secured in the mini market supply chain. Export sales grew by 1.5% YoY, mainly driven by greater sales in Europe and Asia region. Sales in China fell by 51.9% YoY however, affected by the lockdown measures imposed to curb Covid-19.

• 1QFY22 PBT increased by 3.2% YoY to RM9.6m, thanks to greater production efficiency from better economies of scale. While Kawan’s GP margin fell by 4 ppts to 34.1% (1QFY21: 38.1%), dragged by the rising input cost, Kawan’s PBT margin was stable at 14% (1QFY21: 14.3%), due to the lower advertising and promotion expenses.

• Outlook. We remain positive on Kawan’s future outlook, on the back of stronger demand for frozen food among its existing clients and acquisition of new clients. Kawan is also looking to launch new products which include plant-based products to cater to its food service clients. While the rising inflation will likely have a negative impact on consumers’ purchasing power, we are of the view that it might be a blessing in disguise for Kawan as we think that frozen food demand will remain resilient with consumers opting to purchase more frozen food given its more affordable price tag. Note that during the 2008 financial crisis, Kawan’s net profit grew by 15% YoY to RM9.5m. Kawan remains committed to improve on its operational efficiencies and cost optimisation to mitigate the impact from the rising raw material prices.

Source: PublicInvest Research - 24 May 2022