• Kawan Food’s (KFB) FY17 net profit of RM29.9m were below our full year expectations making up about 83%.

• FY17 and 4Q17 revenue increased by 5% and 7.8% yoy driven by increase in sales from major export continents, ie Europe and North America

• Nevertheless, FY17 net profit fell 11.8% yoy on the back of increase in cost and net foreign exchange losses of RM0.7m.

• We lowered our FY18E and FY19E earnings by 19.0% and 21.0% respectively to factor in weak export sales, and the new factory’s delay.

• Maintain Hold with new TP of RM2.66 based on PER 30x

Revenue boosted by yoy growth in Europe and North America

KFB’s FY17 and 4Q17 revenue grew by 5% and 7.8% yoy. Its FY17 improvement came from Asia (+14% yoy), Malaysia and Europe (both at +9%). From 4Q17 perspective, there are positive yoy sales growth in all markets, the majority being in Europe (+44.5%) and North America (+24.5%). However, FY17 net profit dropped by 11.8% yoy from RM33m to RM29.1m because of bigger foreign currency loss compared to the previous year’s (net loss of RM0.7m). Furthermore, cost of sales has been increasing as KFB rented a temporary frozen space through third party while waiting for the new factory to be completed and increasing logistic cost. This resulted in EBIT margin contracting 3.7ppts to 18.2%.

Lowest revenue in the quarter, but improving from previous year

Zooming into its qoq performance, the lower qoq was due to lower overseas promotion and staff cost in preceding quarter. However, sales in Europe rose by 116% qoq in 4Q17. In our view, this was partly due to KFB securing a few contracts from supermarkets in UK mainly, thereby enabling them to promote their brands more aggressively. This is also followed by Malaysia (+0.5%) which in our opinion was higher because of the better consumer sentiment compared to 3Q17.

Pulau Indah factory ready to serve 2Q18 onwards

Management reassured that the factory will be up and running by 2Q18, now that most of the crucial issues related to quality has been resolved. We are positive on the long term outlook of the company as it has the world’s largest market share in paratha, and has a well known brand among the Indian community (proven by an ongoing TV show sponsored by them). In addition, the new factory will be featuring top European technology in creating the puff pastry and there has been an increasing demand for hygienic food products especially in hospitals and construction sites. However, the new factory will not contribute as much as we had expected initially for FY18 and FY19 due to the delay in its commisioning.

Maintain HOLD with new TP of RM2.66

We cut our FY18 and FY19 forecast to RM31.9m (-19.0%) and RM39.5m (-21.0%) justifying that there will be a lag time before the factory will be up and running at its most productive, which we expect to be around 2020. This is also taking into account the strong ringgit which will cause potential risk to their exports in US, apart from difficulties they have been facing in increasing costs. Hence, we have derived a new TP of RM2.66 (from RM2.90 previously) based on unchanged PER of 30x. Maintain Hold.

Source: BIMB Securities Research - 28 Feb 2018