Kawan Food Bhd
(Oct 10, RM2.18)
Upgrade to “buy” with target price (TP) of RM2.53: Kawan Food Bhd (KFB) began its business in the manufacturing, trading and exporting of frozen food products during the late 1970s. To recap, KFB’s unwavering commitment to product quality speaks for itself with evidence in its intensive and continued investment in the state-of-the-art manufacturing facilities. We expect KFB to register double-digit earnings growth for the next three years driven by new production capacity and strong global demand for staple food.

As the frozen food market is growing worldwide, it has created an excellent window of opportunity for KFB as a market leader and largest manufacturer of frozen roti paratha and chapatti to excel with production facilities in Shah Alam and Pulau Indah, both in Selangor, and in China. KFB focuses on three emerging markets — China, India and Indonesia.

In ensuring KFB is a step ahead of its competitors as well as to improve efficiency, KFB acquired a piece of land in the Selangor Halal Hub, Pulau Indah in 2013. The opening of Pulau Indah’s factory, slated to be sometime in the second half of financial year 2015 (2HFY15), will have a production capacity three times that of its existing plant in Shah Alam.

We estimate KFB to register net earnings of RM17.8 million and RM20.3 million for FY14 and FY15 respectively. Its balance sheet is strong with a net cash position of RM30.1 million as at 1HFY14. With a steady cash pile and solid cash flows, we believe the company is able to support its regular dividend payments and capital expenditure moving forward.

The recent selldown made the stock look attractive, therefore we upgrade our recommendation to “buy” with at unchanged TP of RM2.53, based on 15 times price-to-earnings ratio over FY15 earnings per share. Valuation is justified by its strong operating cash flow, a well-established brand name, and strong and visible growth. — BIMB Securities Research, Oct 10

This article first appeared in The Edge Financial Daily, on October 13, 2014.