• Overview. Kawan Food Berhad (KFB) 2Q22 revenue and net profit increased encouragingly to RM80.3mn (+17% QoQ, +46% YoY) and RM10.8mn (26% QoQ, 72.6% YoY) respectively mainly due to i) shipments recovery which drove export sales, ii) non-recurring production disruptions at Pulau Indah plant which was previously affected by COVID-19 infection, and iii) increase in selling prices. Profit margin increased by +1 ppts QoQ and +2.1 ppts YoY to 13.5% on improved economies of scale and operating cost efficiency.

• Key Highlights. Selling price hikes have been fully reflected across their entire clientele in 2Q22 and management is not discounting further hike if input costs remain elevated from current levels. Together with better economies of scale, we believe this will help support margin in FY22.

• Against estimates: Inline. 1H22’s net profit of RM19.4mn were within our and consensus forecast, accounting 46% and 49% of full year forecast respectively.

• Outlook. KFB’s FY22 prospect remain positive supported by higher sales from export markets as well as from new clients. The maiden delivery of orders to new export clients are expected in 2H22. Additionally, KFB continues to launch new products including plant-based which are expected to drive sales in Hotel, Restaurant and Café (HORECA) segment as well as capturing a wider range of consumer preference going forward.

• Our call. We made no changes to our earnings forecast. Reiterate our BUY call with an unchanged TP of RM2.36, pegged at 20x PER. We like KFB for its market leader position in the frozen food arena, healthy fundamentals, and strong balance sheet (net cash of RM70mn as at 2QFY22).

Source: BIMB Securities Research - 23 Aug 2022