Kawan Food Berhad (KFB) 1HFY23’s core net profit of RM14.5mn (QoQ: -18.3%, YoY: -40.6%) was below our and consensus estimates accounting for only 35% and 34% of full year forecast respectively. The deviation against ours was mainly due to weaker-than-expected export sales and higher-than-expected operation costs. Therefore, we have lowered our earnings forecast by 22-23% for FY23-24F. We are adopting a more cautious stance on KFB's outlook due to the anticipation of subdued demand in the near term, particularly in the overseas markets. Consequently, we downgraded KFB to a HOLD, with a lower TP of RM2.00.

• Below expectations. KFB’s 1HFY23 core net profit of RM14.5mn (QoQ: -18.3%, YoY: -40.6%) trailed our and consensus’ expectations, accounting for only 35% and 34% of full year forecast. The deviation against ours was mainly due to weaker-than-expected export sales and higher-than-expected operation costs.

• QoQ. KFB’s 2QFY23 revenue fell by 14.7% QoQ to RM67.5mn, driven by lower sales from both local sales (-11.4%) and export sales (- 17.9%). Core net profit dropped by 18.3% QoQ to RM6.5mn mainly due to lower revenue and higher operating costs (specifically distribution, marketing and labour), although partially mitigated by a lower effective tax rate of 9.4% (-4.4 ppts QoQ).

• YoY. Revenue decreased by 16% YoY, primarily due to lower export sales (-30.5% YoY). There was softer demand especially from North America and Europe, which we believe was a result of inventory rationalisation activities by overseas clients. Nonetheless, the drop in revenue was partially offset by higher local sales (+5.1% YoY). Subsequently, core net profit dragged further by 40.6% YoY due to higher overall operating costs. Profit margin declined by 4 ppts YoY to 9.7%.

• Outlook. We have become more cautious on KFB's outlook following 2 consecutive earnings misses. Amid slowdown in the global economy and absence of festive season, we expect demand to be subdued especially for the oversea market which could impact near-term sales. Nevertheless, margin pressure from higher operating costs is expected to be mitigated by decline in some key commodity prices.

• Forecast. We revised down our FY23-24F earnings forecast by 22-23% as we reduced our export market sales and increased our operation cost assumptions.

• Our call. Following earnings revision, we downgrade KFB to a HOLD with lower TP of RM2.00 (from RM2.60), pegged at 20x PER to FY24F EPS of 10 sen.

Source: BIMB Securities Research - 23 Aug 2023