Kawan Food Trading at FY20E P/E of 15.98x Only

• It is almost certain that there will be massive earnings explosion in the coming quarters for Kawan Food.
• Post-earnings revision and pegging at FY21E P/E target of 39.69x, Kawan Food is worth RM4.84.
• Kawan Food is our top pick.

Improvement in profit margin and production efficiency

• KAWAN's new plant in Pulau Indah has achieved greater production efficiency which resulted in increased profit margin from 37% to 40% in fourth quarter 2019 and first quarter 2020 attributable to the on-going costs optimization and automation solution.

New capacity to meet growing demand

• The management reported in the Q1 FY2020 report that “the production capacity is currently ahead of demand growth, but the new capacity will eventually be taken up by the growing demand in the domestic and export market.” It simply means that Kawan Food growth is unhindered by limitation of capacity. Unlike many glove companies which are already running at full capacity and can only grow their revenue by raising gloves’ Average Selling Price (ASP) (before new production plant becomes operational), Kawan Food is in a well-prepared position to meet the growing demand.

Strong balance sheet

• Kawan food is a net cash company. Cash ratio 1.05x, current ratio 2.88x, debt to equity ratio 0.05x

Valuation for Kawan Food

• The valuation of Kawan Food by way of relative PE are as follows:
• Relative P/E (forward earnings)
  1. In the latest quarter, Kawan Food reported a 35% QOQ and 318.98% YOY increase of its profit, with EPS of 1.84 cent
  2. Assuming the earnings will continue to grow at 35% on a QOQ basis, the following are the EPS forecast

Q1 2020 – 1.84 cents (actual)

Q2 2020 – 2.48 cents (estimate)

Q3 2020 – 3.35 cents (estimate)

Q4 2020 – 4.53 cents (estimate)

2020 Total EPS – 12.2 cents

3. 5 years average P/E ratio of Kawan Food – 39.69

2019 – 62.54

2018 – 30.49

2017 – 33.35

2016 – 42.58

2015 – 29.48

Average – 39.69

4. Valuation based on relative P/E – RM4.84

5 years average P/E x 2020 estimated EPS

= 39.69 x RM0.122

= RM4.84

• Current price of RM1.95 is trading at FY20E P/E of 15.98x only. It represents a discount of 59.7% from our estimated valuation.

Kindly exercise your own due diligence. This is not a recommendation to buy or sell shares.

Deep Value Investing