We came away from our meeting with Kawan Food feeling upbeat on its future outlook. This mainly premised on stronger export sales and new product launches, supported by an increase in headcount. We gather that export orders have been robust, from existing and new customers especially from the US. While raw material costs remain elevated, we think that Kawan will be able to mitigate this by gaining higher economies of scale and achieving lower cost due to on-going initiatives. In addition, we believe that the strengthening of the USD against MYR will benefit Kawan. All told, we reiterate our Outperform call and TP of RM2.50 based on 20x FY23F EPS on Kawan.

• Recap of 2QFY22 results. Revenue grew by 46% YoY to RM80.4m, attributable to the growth in both local and export markets. Given the easing in container shortages and replenishment in orders from its existing clients, Kawan saw its export sales jumped by 84% YoY. Core net profit increased by 74.2% YoY to RM11.5m, mainly due to greater production efficiency following stronger sales orders and absence of production disruption.

• Export sales to remain robust. We understand that export orders have been healthy from its existing customers especially from the US region. This is mainly driven by the replenishment in orders given the easing in shipping containers. Additionally, the group is also looking to secure new mainstream retailers in North America and had recently started its first export shipment to one of its target customers albeit at a small amount. On the other hand, we think that the high inflationary pressure could be a blessing in disguise for Kawan Food, as consumers opt to dine in at home given a more affordable price tag.

• Cost optimisation and production efficiency to protect margins. We gather that Kawan will unlikely go through another round of price hikes given the soft market sentiment. However, Kawan plans to mitigate the hike in raw materials via better production efficiency (higher production output) and the implementation of Industry 4.0 to increase automation and reduce wastages. Furthermore, the strengthening of the USD will likely act as a buffer against the elevated raw material costs.

• Increased headcount to develop higher value products. Going forward, Kawan plans to roll out new high value products (eg: meat free, plant based and cheese sticks) to have a more favourable sales mix that was limited previously due to manpower constraint. The group has managed to obtain approval and targets to bring in a total 400 foreign workers by 1QFY23. We understand that the group is in the midst of on-boarding its new workers and had brought in 37 new workers in August.

Source: PublicInvest Research - 19 Sept 2022