INVENTOR of the world’s first frozen roti paratha, Kawan Food Bhd, sold nearly RM150 million worth of its flat breads and chapatti last year, some 30% of which were exported to the US.

Sales are expected to rise further as a wider variety of products can be made once its new factory in Pulau Indah, Port Klang — five times more capacity than its two Shah Alam plants — is ready by year-end. At a high of RM2.69 on June 9, the stock had gained 47.8% in just one month.

Gains were even higher for its warrants, Kawan-WA, which leapt 85% over one month to close at RM1.63 on June 9.

Part of those gains followed a June 5 initiation note by CIMB Research, telling clients that Kawan (fundamental: 3.00; valuation: 1.10) was worth RM3.65 apiece. BIMB Research, meanwhile, had a RM2.10 target price as at May 29.

If CIMB is right, Kawan-WA presents a cheaper entry into the stock. Closing at RM1.50 last Wednesday, Kawan-WA was trading at a 0.82% discount to the underlying shares. Kawan-WA, which has a strike price of 93 sen and one-for-one conversion ratio, expires on July 28 next year.

In theory, if Kawan rises 49% to reach CIMB’s RM3.65 target price, Kawan-WA should be worth 81% more, at RM2.72, assuming zero premium to the underlying stock.

Yet, considering that warrant holders are not entitled to dividends and the warrants expire in about one year, many have converted them into shares.

Between April 8 and June 24, Kawan’s share base expanded by 15.05 million shares to 198.32 million shares. This diluted executive chairman and largest shareholder Gan Thiam Chai’s direct stake of 56.4 million shares from 30.84% to 28.44%. He is deemed interested in his spouse Kwan Sok Kay’s 9.09 million shares (just under 5%). There are about 70 million more warrants.

It is worth noting that non-executive director Nareshchandra Gordhandas Nagrecha, through Goshenite Ltd, sold 6.1 million shares on April 20 and another one million shares at RM1.80 apiece on May 11, paring his holding to 36.09 million shares or 18.2%.

CIMB’s price target is based on a 10% discount to its 2016 food and beverage sector multiple of 25 times earnings to reflect Kawan’s small market capitalisation (RM485.9 million) and tight trading liquidity (93% share base held by top 30 shareholders as at April 8). “Potential catalysts for the stock include securing tax incentives and the start of commercial production at the new factory in 1Q2016,” CIMB says in a June 24 note.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in Capital, The Edge Malaysia Weekly, on June 29 - July 5, 2015.

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