Kawan Food Bhd (Kawan) reported a 47.5% YoY growth in 2QFY24 net profit to RM8.4m, primarily driven by heightened export demand especially from the Europe and North America markets. After adjusting for non-core items, Kawan’s 2QFY24 core net profit came in at RM9.0m. 1HFY24 core net profit of RM18.4m was in-line with our and consensus estimates, accounting for 49% and 51% of full-year estimates, respectively. We continue to expect frozen food demand to remain resilient as it generally offers greater convenience and a more affordable option as compared to dining out amid higher cost of living. We find Kawan’s valuation attractive, as it is currently trading at 16x, which is close to -1SD of its 3-year average forward PE. Therefore, we maintain our Outperform call on Kawan, with a lower TP of RM2.30 based on a lower PE multiple of 18x (close to 3-year average forward PE) pegged to FY25F EPS.

• 2QFY24 revenue rose 5.4% YoY to RM71.1m, owing to improved sales fromthe export market. Revenue from its Malaysian market decreased by 21.5%QoQ to RM31.6m as a result of softer local demand, in contrast with higherdemand observed in 1QFY24 due to the festive season. Export sales improvedin 2QFY24, mainly driven by greater sales from its European (+69.6% YoY) andNorth American (+39.2% YoY) markets. However, this was partly negated bysofter demand from its Chinese market (-50.1% YoY).
• 2QFY24 core net profit increased significantly by 177.3% YoY to RM9.0m.The improved performance was likely attributable to greater economies of scale, in tandem with heightened sales especially from the export market. As such, Kawan’s GP margin increased marginally by 0.9ppts YoY to 33.2% (2QFY23: 32.3%).
• Outlook. While the recent appreciation in MYR may have a negative impact on Kawan’s export sales, we believe that the impact will be partially mitigated by the potential cost savings from lower raw material cost. Nevertheless, we are still positive on Kawan’s future prospects, as we expect frozen food demand to remain sturdy on stronger local and export sales, as we believe that the higher cost of living is a blessing in disguise for Kawan Food, as consumers would likely choose to eat at home given that it is the more affordable option.

Source: PublicInvest Research - 21 Aug 2024