• Kawan Food’s (KFB) 1Q18 core profits of RM4.9m were below our expectations at 15% of our full year forecast.

• 1Q18 core profit declined 26.3% qoq due to higher foreign currency losses and low turnover.

• We expect higher earnings from new plant beginning 3QFY18.

• Pending a review, we maintain hold with a TP of RM2.66 at the moment.

Earnings dropped due to lower exchange rate

KFB 1Q18 revenue increase 0.7% qoq with RM46.3m yet declined 2.6% yoy and barely met our full year forecast making up 21%. Poor performance was primarily due to lower exchange rate. Large impact came from North America with sales down by 25% yoy and Europe by 3%. Pre-tax profit margin fell to 10.3% from 14.7% a year ago.

Low qoq performance

On qoq basis, 1QFY18 core profits fell 26.3% to RM4.9m. This is due to lower turnover rate, higher foreign currency losses (1QFY18 – loss ss RM0.1million) and higher opeRM0.9mill, 1QFY2017 – loration costs. We note that the sales from North America and Oceania regions qoq declined 22.1% and 31.5% respectively.

New plant utilisation lacks clarity

Looking forward, we are positive on the structural growth from the new capacity of its new plant. The new facility is expected to boost the paratha production by 3-fold while freezer capacity will be 5 times larger. However, there is clarity lacking on the utilisation of the new plant.

Dividend paid

As expected no dividend was declared for the quarter under review. An interim single tier dividend of 2.5 sen per ordinary share was declared and paid during the quarter. We expect a total dividend of 12.6 sen FY18 translating to dividend yield 1.6% at current level.

Maintain hold, pending review

No adjustment was made to our earnings forecast. We maintain our hold recommendation with an unchanged TP of RM2.66 pending review and meeting with management. Our TP is based on a PER 30x on FY18EPS. This is to reflect increase in capacity of the new plant in Pulau Indah that will be up operating in 3QFY18.

Source: BIMB Securities Research - 25 May 2018