Kawan Food’s (Kawan) 2QFY23 net profit fell by 48.1% YoY to RM5.7m, mainly dragged by the decline in exports especially in the North America region. After adjusting for non-core items, Kawan’s 2QFY23 core net profit came in at RM3.2m. 1HFY23 core net profit of RM10.8m was below consensus expectations, accounting for 26% of full-year estimates. We reintroduce our FY23-25F earnings forecasts following a temporary cessation of coverage. Despite the weaker set of results, we continue to like Kawan as we expect Kawan’s growth to be driven by the resilient demand for frozen food, stronger flatbread export sales from its new export clients as well as new product launches. We maintain our Outperform call with a TP of RM2.10 based on 20x FY24F EPS.

• 2QFY23 revenue declined by 16.1% YoY to RM67.5m, due to the softer demand from overseas markets especially from the North America (-49.1% YoY) region. We attribute the decline in North America sales to the normalization in sales, given one-off surge in sales during 2QFY22 due to the easing in shipping constraints. On a brighter note, local sales grew by 5.1% YoY to RM34.3m, likely attributable to festive spending.

• 2QFY223 core net profit fell by 71.7% YoY to RM3.2m. The weaker performance was likely dragged by the lower production efficiency due to the softer sales and higher electricity cost, leading to a 5.0 ppts decline in its net profit margin to 8.5% (2QFY22: 13.5%).

• Outlook. We expect Kawan to post better results in 2HFY23, on the back of a resilient demand for frozen food, as we think that consumers will likely opt to dine-in at home, given the rising cost of living. Additionally, we are also expecting a recovery in sales volume, driven by new export clients and new product offerings. While the higher operating cost (electricity cost and staff cost) will affect Kawan’s profit margins, we believe that it will be mitigated by the strengthening of the USD and lower raw material cost with CPO and wheat prices having tapered off from its peak.

Source: PublicInvest Research - 23 Aug 2023