Kawan Food’s (Kawan) 1QFY24 core net profit grew by 23.4% YoY to RM9.4m, primarily driven by stronger local sales due to festive spending and heightened demands from the export market. Results were in line with our and consensus expectations, accounting for 25% and 26% respectively. Nevertheless, we adjust our forecast lower by an average of 1.5% due to bookkeeping changes. We continue to like Kawan on growing demand for frozen food from both local and export markets, new product launches in addition to being supported by favourable forex rate. As the stock is currently trading at c.16x forward PE (see figure 1), valuation is deemed attractive as it is trading at -1SD of its 3-year average forward PE. We maintain our Outperform call, with a higher TP of RM2.40, as we roll over our valuation base year to 20x FY25F EPS.

• 1QFY24 revenue grew by 9.4% YoY to RM80.6m, mainly due to stronger sales from its local and export markets, particularly the North American market. Kawan saw its sales in the Malaysian market increased by 15.6% YoY to RM40.2m, which we believe was driven by festive spending. Additionally, its exports to North America market surged by 54% YoY, mainly driven by the normalization in orders and the favourable foreign exchange rate. However, this was partly negated by weaker demand in its European market (-36.0% YoY).

• 1QFY24 core net profit increased by 23.4% YoY to RM9.4m. The stronger performance was likely driven by greater production efficiency from better economies of scale, given the increase in sales. As a result, its GP margin grew by 2.7ppts to 28.7% (1QFY23: 26.0%).

• Outlook. We foresee Kawan’s earnings to grow by 19% in FY24F, driven by robust demand for frozen food products on recovery in export sales and new product launches (eg: Roti Boom). We understand that the recently launched product (Roti Chanai) has been gaining traction, thanks to the group’s strong marketing and advertising activities. Going forward, we expect demand for frozen food to remain resilient, as consumers opt to eat at home due to the high inflationary pressure. In addition, better cost control measures (SKU rationalization) and stronger USD should lead to an expansion in profit margins for Kawan.

Source: PublicInvest Research - 17 May 2024