• Overview. Kawan Food’s (KFB) 1QFY21 revenue grew to RM65.3m (+7.8% qoq, +21.8% yoy) driven by increased in sales especially in US (+46% yoy) and Malaysia market (+26% yoy) ii) better sales promotion and marketing activities during Chinese New Year festival in Malaysia. On yoy basis, most of the export markets registered higher sales growth except for Europe (-8%), Africa (-18%) and Oceania (-18%). Overseas sales contributed about 55% towards total revenue.

• Key highlights. Additionally, its EBITDA rose to RM12.1m (+12% qoq, +39% yoy) benefiting from ERP system installed which provides better cost management for its input materials. In tandem with that, PBT and core net profit margin rose to 14% and 13%. We observed its inventories are lower at RM27.4m (-9% yoy) from RM30.2m, we think this is mainly due to shorter stock holding period as a result of higher sales generated.

• Against estimates: Inline. 1QFY21 core net profit came at RM8.4m (+43% qoq, +25% yoy) made up 24% and 21% of our and consensus full year forecast.

• Dividend: An interim single tier dividend of 3.0sen was declared and has been paid on 30 March 2021 (FY20: 2.5sen/share).

• Outlook. During 1HFY21, KFB has successfully installed its solar system as planned. This would help KFB to save 20% of its electricity cost and contribute to more a sustainable energy usage. As guided by the management, the Pulau Indah plant current utilisation rate is around 50-60%. We expect the utilisation rate to improve further following another year of confinement environment in Malaysia as well in rest of Asia market. As local herd immunity is likely delayed, KFB is well-positioned to benefit from the situation. We expect KFB’s earnings to grow at 2-year CAGR of 15% from RM35.7m in FY21 to RM47.2m in FY23F driven by pandemic-market demand that would transform frozen food to become comfort food following longer-than-expected lockdown impact.

• Our call. We like KFB for its healthy fundamental, net cash company and market leader position in frozen food arena. The stock currently trades nearly -1SD at 19.7x forward PE. We recommend BUY call on the stock on the TP to of RM2.78 based on 28x PE applied to FY21 EPS of 10 sen.

Source: BIMB Securities Research - 1 Jun 2021