KAWAN Food Bhd, which counts frozen paratha and chapatti among its bestsellers and exports about 70% of its products to the US, the UK, Australia and New Zealand, could be among the few local exporters to benefit from a weaker ringgit.

In fact, the group saw its net profit improve 34.9% to RM5.77 million — partly lifted by exchange rate gains — in its third quarter ended Sept 30, 2014. Since last September, the ringgit has weakened even further and is currently expected to continue trading in the range of 3.5 to 3.7 against the US dollar this year.

If the stellar showing is repeated when Kawan Food’s full-year earnings are reported by the end of this month, its shares and warrants could receive a boost.
Closing at 52 sen last Tuesday, Kawan-WA was trading at a 5.84% discount to the mother share, which closed at RM1.54 apiece.

Note that the exercise price of the warrants has been reduced to 93 sen from RM1.40 subsequent to a one-for-two bonus issue that saw the issuance of 90 million bonus shares and 29.23 million new warrants.

The frozen food product manufacturer is currently consolidating its operation from Shah Alam to a new factory in Pulau Indah while at the same time expanding capacity. The new facility will allow Kawan Food to upgrade its refrigeration system and its warehousing. The move is expected to be completed in the third quarter of this year.

This positions the warrants, which expire in July next year, relatively well to benefit from improved earnings from the move. In the near term, a catalyst for the group’s earnings would be the ringgit’s depreciation against the greenback.

Annualising its recent nine-month earnings per share of 12.63 sen, the shares are trading at about 9.14 times earnings based on their RM1.60 close last Monday.

This isn’t very cheap or very expensive either, considering the group is sitting on a sizeable cash pile of RM34.38 million, which works out to 18.8 sen net cash per share.

It is worth noting that the group has announced plans to use the cash — of about RM100 million — over the next four years for expansion purposes. As the group puts its cash to use, it would be interesting to see if it can unlock more of its growth potential.

Kawan Food’s relatively small market capitalisation of RM292.3 million may make it too small for some institutional investors. However, Lembaga Tabung Angkatan Tentera has a 4.99% stake in it. Its major shareholders are Datuk Thiam Chai Gan with a 32.8% stake and Nareshchandra Gordhandas Nagrechawho with 23.65%.

This article first appeared in The Edge Malaysia Weekly, on February 23 - March 1, 2015.

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