• Overview. Kawan Food Berhad (KFB) 3Q22 revenue increased by 12% YoY mainly due to higher overseas demand and container shipments congestion recovery which drove export sales (+35.7% YoY) especially from US. Net profit jumped higher or by 35% to RM10.4mn thanks to lower effective tax rate due to utilisation of tax incentive and reinvestment allowance. However, on QoQ basis net profit dropped by 4% mainly due to the softening in local sales post Raya festive period.

• Key Highlights. Main commodity prices such as wheat, CPO and sugar have been slowly trending downwards from its peak in 2Q. Together with higher economies of scale, we believe KFB would be able to mitigate higher other operating costs (i.e. labour and utilities) and maintain its profit margins in the next quarters.

• Against estimates: Inline. 9M22’s net profit of RM29.8mn was in line with our and consensus forecast, accounting 71% and 73% of full year forecast respectively.

• Outlook. KFB’s 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 4Q22. Additionally, KFB plans to launch new products including plant-based which we expect to drive sales in the Hotel, Restaurant and Café (HORECA) segment as well as capturing a wider range of consumer preference going forward.

• Our call. Reiterate our BUY call with a higher TP of RM2.60, pegged at 20x PER as we roll our valuation to FY23. We like KFB for its lead position in the frozen food arena, healthy fundamentals, and strong balance sheet (net cash of RM70mn as at 2Q22).

Source: BIMB Securities Research - 23 Nov 2022