Kawan Food

Kawan Food: Kawan Food (KFB)’s net profit, which swelled by an impressive 73.7% y-o-y, came in above our expectation. Better sales were seen from its North America and Asia divisions, with increases of 59% and 20.6% respectively, while margins widened on cheaper raw materials. We believe the fact that Kilat Kaca SB has ceased to be KFB’s major shareholder would not impact on KFB’s operations. We maintain our earnings estimates but upgrade our TP to RM1.00 as we roll over to FY10 numbers. KFB is a long-term investment as its new China operation, which has more than double its current production capacity, would generate strong sales given the firm Chinese demand. Maintain BUY.

Stable as it is. Overall, Kawan Food’s 1H net profit of RM6.4m was 17.3% above our projection. On a q-o-q basis, net earnings improved by 18.9% on better margins as the prices of raw commodities have gone down, such as for wheat, which is now at its cheapest and at the same level as in 2007. Y-o-y sales and earnings were better by 30.6% and 73.7% respectively, mainly due to higher sales of its frozen food.

Increasing export to North America. Significant growth in sales is seen from North America (which contributes approximately 30% of group revenue), where there was a 59% increase over the previous corresponding quarter. The economic slowdown may have had an impact on consumer spending patterns as consumers may have switched to convenience frozen foods. KFB’s products comprise Roti, Paratha, spring rolls and other flour-based products which are considered affordable, and which we believe will be to the advantage of KFB. Earnings were further enhanced by cheaper raw material prices.

China operation to start in 3QFY09. KFB’s operations in China, Kawan Food (Nantong) Co. Ltd, are expected to commence operation by 3QFY09 with a production capacity that is double that in the existing plant in Malaysia. According to the management, production capacity will be increased in phases. We do not expect immediate contribution from this plant as it undergoes a period of gestation but believe that contribution may kick in next year as the plant reaches full capacity next year.

52 week H | L Price (RM) 0.90 0.50

Major Shareholders (%)
Gan Thiam Chai 33.30

Principal Activities: Manufacturing frozen food products such pau, pratha, spring rolls and others.

BY OSK188
Analyst: Law Mei Chi