Kawan Food Bhd (Kawan) reported a 25.9% YoY decline in 3QFY23 net profit to RM7.7m. After stripping off non-operating items such as forex gain, inventories write-off, write back of slow-moving inventories and fair value loss on financial assets, 3QFY23 core net profit stood at RM7.7m, +6.6% YoY. This was mainly driven by stronger export sales, primarily in North America and Asia. For cumulative 9MFY23, core net profit of RM18.6m was in line with our expectation but came in below consensus at 73% and 61% respectively. We maintain our FY23-25F earnings forecasts. We continue to like Kawan as we expect its growth to be supported 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.

• 3QFY23 revenue rose 10.3% YoY to RM79.2m, driven by stronger sales from export markets especially among the North America (+41.2% YoY) and Asia region (+17.8% YoY). The better performance was mainly due to the resumption in orders from its existing customers given the ease in inventory glut. On the other hand, local sales dipped marginally by 0.4% YoY from RM31.4m in 3QFY22 to RM31.3m in the current quarter.

• 3QFY23 core net profit increased by 6.6% YoY to RM7.7m, likely due to higher production efficiency from greater economies of scale given the stronger sales from export markets. This had resulted in a 3.6ppts improvement in Kawan’s GP margin to 33.8% (3QFY22: 30.2%).

• Outlook. We continue to expect Kawan to post stronger QoQ results in 4QFY23, driven by a stronger demand from both local and export market. This is mainly due to seasonality factors which we believe should see a pick-up in local sales, further supported by the resumption in orders from its export clients and new product offerings. In addition, we think that frozen food demand will remain resilient as consumers may choose to dine-in at home giving the rising cost pressures. We are anticipating an improvement in margins on lower raw material costs and a stronger USD. Note that Kawan’s key raw material, wheat and CPO prices have declined by a YTD of c.30% and c.10% respectively.

Source: PublicInvest Research - 23 Nov 2023