• At 36% of our full year forecast, Kawan Food’s (KFB) 1H17 core earnings of RM15.5m (excluding forex loss of RM1.1m) were inline with our expectations. We expect strong earnings respite in 2H17 underpinned by the new factory coming on stream.

• 1H17 core earnings was flat yoy as the impact from higher input costs was offset by lower marketing expense and effective tax rate.

• 2Q17 core earnings gained 80.6% on the back of higher revenue achieved due to higher sales from all regions except Europe .

• Management noted that the new factory is on track to come on stream in 2H17. We believe this should ease supply constraint and enhance efficiency.

• Hold call maintained with TP of RM4.85 based on 30x PE applied to its FY17 EPS.

Boost from domestic sales and lower effective tax rate

KFB’s 2Q17 core earnings rise 27% yoy to RM10m mainly by lower effective tax rate. Operationally, 2Q17 earnings notched higher on lower marketing expense which more than offset the weak exports revenue (-9.7%). For 1H17, earnings came in flat with respite coming mainly from lower effective tax rate; operationally, EBIT declined 4% YTD impacted by higher input cost.

Higher qoq performance driven mainly by robust local sales

Core earnings recovered strongly by 80.6% qoq. The respite was due to higher domestic and export sales except Europe. The former, in our view was possibly driven by the Hari Raya festivities. We also note that the sales improvement from North America (+19%) and Oceania (+86%) regions were possibly be due to the timing of orders from local distributors; sales are usually strong in 2Q and 3Q.

Expect earnings boost from new factory coming in 2H17

Management expects the new factory to come on stream in 2H17. The new facility is expected to boost the paratha production by 3x while the new freezer capacity would be 5x larger. In the immediate term, we believe this would provide much needed capacity boost for the domestic sales which is currently complemented by production from KFB’s factory in China.

Maintain HOLD with TP of RM4.85

We maintain our forecast at this juncture in view of the improving global economic outlook and robust domestic demand which is aided by evolving lifestyle. Our TP remains at RM4.85 based on unchanged 30x PE applied to FY17 EPS. Maintain HOLD as we believe the stock potential has been largely reflected.

Source: BIMB Securities Research - 21 Aug 2017