• Kawan Food’s (KFB) 9M17 core earnings of RM25.07m were below our full year expectations making up only 58%

• Core earnings fell 6% yoy due to lower sales from major export countries (N. America and Europe), as well as higher input cost

• Its 3Q17 core earnings also fell 4.2% qoq on the back of lower sales from all regions especially Malaysia, N. America and Europe.

• We pared down our FY17 and 18E earnings by 19.5% and 6.5% respectively to factor in the delay opening of new plant, weaker-than-expected export sales and rise in raw material costs.

• Maintain Hold with new TP of RM2.90 based on PER 30x

Earnings fell due to lower export sales and higher input cost

KFB’s 9M17 revenue grew 4.2% yoy on improved overall sales especially from Malaysia (+11%) and Rest Asia (+16.4%). However, 9M17 core earnings (after adjustments for forex gain/loss) fell -6% yoy to RM25.07m mainly due to lower sales from major export countries (North America: -6.8%; Europe: -0.5%) and higher raw material prices. As a result, EBIT margin contracted 2.6ppts to 15.5%.

Lower qoq performance

On qoq basis, core earnings fell 4.2% due to lower sales from Malaysia (-22.2%), North America (-1%) and Europe (-51%). In our view, the drop in Malaysia sales was partly due to the preceding quarter’s higher base, i.e. strong sales from Hari Raya festivities. We also note that the sales decline from North America and Europe was possibly due to the timing of orders from distributors where sales are usually strong in 2Q.

Another delay in the new Pulau Indah factory

The new factory is facing teething problems and only expected to be commissioned in 1Q18 (previously 2H17). Currently, the existing factory is running at full capacity while demand growth is supplemented by its factory in Nantong. Although the delay in the opening of the new facility in Pulau Indah is longer than expected, we are optimistic on the company’s long-term prospects due to the potential structural earnings growth from the new capacity. The new facility is expected to boost the “paratha” production by 3-fold while the new freezer capacity would be 5 times larger.

Maintain HOLD with new TP of RM2.90

We cut our FY17 and FY18 forecast to RM35m (-19.5%) and RM48.7m (-6.5%) respectively to reflect the delay in the opening of the new factory, weaker-than-expected export sales and rise in raw material costs. Hence, we have derived a new TP of RM2.90 (RM3.64) based on unchanged PER of 30x. Maintain Hold.

Source: BIMB Securities Research - 22 Nov 2017