• Kawan Food’s (KFB) 9MFY18 core net profit of RM16.7m were inline with our forecast at 76% whilst below for consensus at 62%.

• Its 3QFY18 core profit declined 30% yoy due to unfavourable USD/RM exchange rate and higher start-up cost of new plant in the current quarter.

• We expect higher earnings from new plant beginning FY19.

• We maintain hold with a TP of RM2.20 based on PER28x.

Earnings dropped due to weaker USD/RM exchange rate

KFB 9MFY18 revenue declined 2.1% to RM147.2m compared to 9MFY17. Core net profit fell by a hefty 33.3% and making up 76.0% our full year forecast. The poor performance was primarily due to an unfavourable USD/RM exchange rate and higher operation costs. The largest impact came from North America with sales down by 16.5% yoy and Oceania region by 6.3%. As a result, pre-tax profit margin fell to 13.5% from 19.3% a year ago.

Improved qoq performance

On qoq basis, 3QFY18 core net profit increased 30% to RM6.7m. This is due to an increase in export sales and gain in foreign currency exchange (3QFY18: gain RM0.6m, 3QFY2017: loss RM0.7m). We note that the sales from North America region spiked 42% qoq and 3% yoy.

New plant operation has commenced

As guided by the management, the new plant in Pulau Indah has completed? However, we are unable to determine whether it is commissioned as expected, ie without any technical glitch considering the prolonged delay. Moving forward, we are positive on the structural growth that may be derived from the capacity of its new plant. The new facility is expected to boost the paratha production by 3-fold while its freezer capacity will be 5 times larger.

Maintain hold

No adjustment was made to our earnings forecast as we had imputed the slower sales and delay in new plant. We maintain our hold recommendation with an unchanged TP of RM2.20. Our TP is based on PER 28x on FY19EPS. This is to reflect the increase in capacity – hence enabling the company to cater to demand growth – of the new plant in Pulau Indah that is expected to be up and operating in 4QFY18.

Source: BIMB Securities Research - 23 Nov 2018