Kawan Food Berhad (KFB) 1QFY23’s core net profit of RM8mn (QoQ:  -20.3%, YoY: -8.8%) was below our and consensus estimates accounting for only 17% and 18% of full year forecast respectively.  The deviation against ours was mainly due to higher-than-expected  operation costs, hence our new assumption and earnings cut by 11- 12% for FY23-24F. Notwithstanding that, KFB’s FY23 earnings outlook remains supported by new products, higher sales from new clients and recovering export market. Maintain a BUY call on KFB,  with TP of RM2.60, pegged at 20x PER to FY24F EPS.

• Below expectations. KFB’s 1QFY23 core net profit of RM8mn (QoQ: - 20.3%, YoY: -8.8%) trailed our and consensus’ expectations,  accounting for only 17% and 18% of full year forecast. The deviation  against ours was mainly due to higher-than-expected operation costs.

• QoQ. 1QFY23 revenue of RM79.1mn rose by 9.3% QoQ, driven by  better local sales (+5.7%) and recovery in export sales (+13.1%).  However, KFB’s core net profit (excluding impairment on trade  receivables and inventories write off) waned by 20% mostly due to  higher operating cost as well as higher effective tax rate.

• YoY/ YTD. Revenue increased by 15.2% YoY, on the back of seasonal festive season spending. Sales from local market grew by 20.7%, while  export market jumped by 10.4% thanks to rising demand especially from Europe. Nevertheless, core net profit that fell by 8.8% was due  to higher overall operating costs (i.e., input cost, labour and  electricity). Hence, core profit margin that declined by 2.7 ppts to  10.1% YoY.

• Outlook. KFB’s FY23 prospect remain intact supported by higher sales  from new products, sales from new clients and recovering export  market. We understand that KFB expects orders from its new sizeable  export customers to kick off from 2QFY23 onwards. Additionally, KFB  new products launches are expected to drive sales in the Hotel,  Restaurant and Café (HORECA) segment as well as capturing a wider  range of consumer preference going forward.

• Forecast. We revised down our FY23-24F earnings forecast by 11-12% in line with new operation cost assumptions.

• Our call. Reiterate a BUY call with TP of RM2.60, pegged at 20x PER  as we roll over valuation to FY24F EPS of 13 sen. We continue to like  KFB for its strong brand name in the frozen food market, growing overseas demand and strong balance sheet (net cash of RM92.8mn as  at 1QFY23).

Source: BIMB Securities Research - 19 May 2023