Kawan Food Bhd (Trading Buy)

• After sliding from a recent high of RM2.88 on 26 August, KAWAN’s share price has entered into a consolidation mode.

• A technical recovery could be in the offing as the stock bounces up from the lower end of its sideways trading range. This is supported by the share price crossover of its 50-day moving average line.

• On account of the positive technical signals, we reckon the stock could test our resistance thresholds of RM2.63 (R1; 10% upside potential). Beyond R1, it may then challenge our next resistance barrier of RM2.83 (R2; 18% upside potential). • Our stop loss level is pegged at RM2.17 (or 9% downside risk).

• KAWAN (as a manufacturer and exporter of frozen food products) is a beneficiary of the shift in consumer preference to eat more at home in the wake of the Covid-19 pandemic.

• Reflecting the increased demand, the Group posted net profit of RM8.8m (+222% YoY) in 2QFY20, taking 1HFY20’s bottomline to RM15.5m (+258% YoY). Interestingly, its 1HFY20’s profit has already surpassed FY19’s full-year performance of RM12.0m.

• Consensus is currently projecting earnings of RM36m in FY20 and RM45m in FY21. This translates to forward PERs of 23.9x this year and 19.1x next year

. • KAWAN is in a financially stable position with net cash holdings and quoted investments of RM53.7m as of end-June this year.

SDS Group Bhd (Trading Buy)

• A technical rebound could be forthcoming for SDS shares, which might have already hit a bottom near RM0.22 (as measured by the Fibonacci retracement level of 50% from its trough in late March to a peak in early August).

• This comes as the stock – following a tumble of 34% from a high of RM0.335 – is entering an oversold territory as indicated by its RSI reading.

• Riding on the positive momentum, its share price will probably climb towards our resistance thresholds of RM0.26 (R1) and RM0.30 (R2), which represents upside potentials of 18% and 36%, respectively.

• We have set our stop loss level at RM0.19 (or 14% downside risk).

• SDS, listed on the ACE market in October last year, is in the business of manufacturing and distribution of bakery products, as well as operations of food & beverage outlets.

• That said, the Group’s fundamentals are relatively resilient, with historical net profit ranging between RM3.9m and RM7.7m over the past five financial years.

• In 1Q FY March 2021, SDS managed to break even despite the restrictions imposed during the Covid-19 related Movement Control Order periods (versus 1QFY20’s net profit of RM1.1m).

• Assuming the Group could register normalised annual net profit of RM5.6m (which is the average of the last five financial years), this would imply PER valuation of 15.9x.

Source: Kenanga Research - 17 Sept 2020