• Kawan Food’s (KFB) FY18 core profits of RM23m were above our forecast at 105% yet below consensus at 93%.

• 4QFY18 core profit decreased 12% qoq due to underestimation of tax expense for the past 3 quarters.

• Dividend of 2.5sen was declared for FY18, translating to 1.5% yield similar to the amount awarded previous year.

• We lowered our FY19F and FY20F earnings by 14% and 25% respectively to factor in weak export sales, higher tax rate and the new factory’s delay.

• Maintain hold with new TP of RM1.50 based on PER24x.

Earnings fell due to weaker USD/RM exchange rate

KFB’s FY18 revenue increased 1.9% to RM200.0m compared to FY17. However, core net profit fell a hefty 27%, to RM23.2m. The poor performance was primarily due to unfavourable USD/RM exchange rate and higher operation costs. The largest impact came from North America with sales down by 9.4% yoy. As a result, pre-tax profit margin fell to 15% from 18% a year ago.

Poor qoq performance

On qoq basis, 4QFY18 core net profit decreased 4% to RM6.5m. This is due to underestimation of tax expense in the past 3 quarters. Effective tax rate in 4QFY18 was at 39% meanwhile the rest of the quarters averaged at 15%. We note that the overseas sales were suppressed at 0.3% qoq, which saw revenue from North America falling 8%. Overseas sales contributed 60% towards KFB revenue.

New plant operation has commenced operations, finally

As guided by the management, the new plant in Pulau Indah has completed yet we are unable to ascertain whether it is fully operational. Moving forward, we are positive on the potential structural growth from the new 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

We have lowered our FY19 and FY20 forecast to RM23m (-14%) and RM28m (-25%) justifying that there will be a lag time before the Pulau Indah plant is able to run at its most productive, which we expect to be around late 1H19. This also taking into account a slightly stronger ringgit versus 2018, causing potential risk to their exports performance We also note from difficulties they have been facing in rising operation costs, which we have imputed in our new forecast. Hence, we have derived a new TP of RM1.50 (from RM2.20 previously) based on PER 24x, which is its 5-year PE average. Maintain Hold.

Source: BIMB Securities Research - 1 Mar 2019