This article first appeared in The Edge Financial Daily on June 18, 2018
Kawan Food Bhd
(June 14, RM2.35)
Maintain add with an unchanged target price (TP) of RM3.14: At the end of last week, we arranged a teleconference call for Kawan Food Bhd managing director Timothy Tan with around 20 buy-side fund managers and analysts. The company indicated that almost all the required government approvals for its new factory have been secured and it is just waiting for a halal certification from the Malaysian Islamic Development Department (Jakim). Commercial operations at the new factory in Pulau Indah is slated to start in July 2018.
Kawan Food stated that total capital expenditure for its new factory in Pulau Indah is around RM200 million. The new factory has three to four times the roti paratha and chapati production capacity of its existing factory. The existing factory was already running at full capacity and Kawan Food was unable to introduce other product varieties as it could only focus on bestselling products. With just the existing factory, it would also be unable to launch new products for export. For example, one new product Kawan Food is looking at launching is wholemeal paratha bread.
One of the exciting new products that Kawan Food would be producing at its new factory is “fresh-frozen” breads. The breads would be frozen immediately after production, for export. At the shops, they would chilled at 10°C to ensure shelf life of two weeks. Such “fresh-frozen” products have been gaining popularity in the US and Europe in the past few years. Kawan Food plans to launch its own “fresh frozen” bread product in the US in the third quarter of 2018.
We expect domestic demand for Kawan Food’s bread products to remain strong this year with the zero-rated goods and services tax (GST) effective June 1. Its domestic revenue growth was flat in financial year ended Dec 31, 2015 (FY15) as domestic demand was negatively affected by the implementation of GST that year. However, its domestic revenue recovered in FY16 and FY17, as more households ate at home instead of going out. Kawan Food benefited from this trend. Domestic revenue constituted 39% of group revenue in FY17 (70% in FY12), with export sales rising over the past six years.
We continue to like Kawan Food’s defensive food and beverage (F&B) business, and believe revenue growth will likely come from new products such as “fresh-frozen” breads. We maintain our earning per share forecasts and TP, based on 20 times calendar year 2019 forecast price-earnings (PE) (at a 20% discount to our 25 times target PE for the F&B sector). Potential key rerating catalysts are the successful takeoff of the new factory and higher export revenue. A key downside risk is weak export sales. — CGSCIMB Research, June 13