• Kawan Food’s (KFB) 1HFY18 core profits of RM10.2m were below our and consensus estimates at 32% and 28% respectively.

• 2QFY18 core profit increased 8.4% qoq due to positive gain on foreign currency exchange and higher turnover from Malaysia sales.

• We expect improved earnings from new plant beginning FY19.

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

Declined profit due to lower exchange rate and sales

KFB’s 1HFY18 core profit of RM10.2 barely met our full year forecast making up only 31%. Poor performance was primarily due to lower USD exchange rate versus the ringgit, and higher operation costs. Additionally, large negative impact came from North America with sales down by 27% yoy and Europe by 3%. Pre-tax profit margin fell significantly to 12.1% from 17.8% a year ago.

Higher qoq performance driven by robust local sales

On qoq basis, 2QFY18 core profits increased 8.4% to RM5.3m. This is due to higher turnover rate and favourable currency exchange (1QFY18 – loss RM0.9mill, 2QFY2018 – gain RM0.8million). We note that the sales from Malaysia and North America regions qoq increased 26.6% and 14.1% respectively.

New plant operation still on trial

Moving forward, we are positive on the fundamental 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 lack of clarity on the full operation timeline – although this is guided by management to start in 4QFY18 – of the new plant production line. The current oriental production line in Shah Alam Seksyen 16 has completed their transfer whereas the paratha’s and chapatti’s production line in Seksyen 15 will soon be relocated.

Maintain forecast and hold, pending review

No adjustment was made to our earnings forecast, although it is likely from the 2Q18 earnings that it would be difficult for the company to meet our numbers. We maintain our hold recommendation at this moment, with an unchanged TP of RM2.66, pending review and post- 2Q results guidance from management. Our TP is based on a PER 30x on FY18EPS.

Source: BIMB Securities Research - 23 Aug 2018