• We remain Neutral on Kawan Food’s prospects, following weak quarter performance recently and our expectation for a moderate performance in sales for 2018.

• Kawan Food’s new plant in Pulau Indah is still on trial basis and facing delay in commencing operations to December 2018, from recent target for October 2018.

• Following a strong earnings cycle between FY13-FY16, we now expect moderation in earnings growth for FY18 and FY19. We revised lower our earnings forecast by an average 30% for FY18/FY19/FY20 to RM22m, RM28m and RM39m.

• We maintain our HOLD recommendation with TP of RM2.20 with revised PER of 28x based on 3 years historical average PE.

Delays in new plant operation

According to management, Pulau Indah’s plant is facing another delay in full operation as expectation of commencement in October is pushed to December 2018. The plant is still operating on trial basis and their paratha and chapatti line is yet to be relocated.

Lower export sales registered

The recent financial result reflected 66% of the export markets revenue was negative in comparison to 1HFY17. North America holds 41% of the export sales, registered a 27% decline from RM29.7m in 1HFY17 to RM21.8m. Europe, Africa and Oceania also recorded sales decline with 3.4%, 24.7% and 4.8% respectively in 1HFY18. We estimated a reduction between 2-8% in revenue as sales growth in the domestic market and rest of Asia remain positive.

Impacted by higher operation costs

The new plant is expected to incur higher electricity costs due to higher volume production capacity (5,000 paratha pieces/hr) and larger cold room requirement. The delay faced is expected to add a 5% increase in operation cost from RM118m to RM126, accumulated to a 60% margin cost.

Maintain HOLD revised TP of RM2.20

We revised our FY18/FY19/FY20 earnings forecast 30% lower as we expect growth remain to be modest and unexciting for FY18. We lowered our export sales and increase the production costs assumptions. We maintain our HOLD recommendation with a revised TP of RM2.20 after we applied 28x PER rolled over to FY19.

Source: BIMB Securities Research - 27 Sept 2018