This article first appeared in The Edge Financial Daily, on November 5, 2015.
Kawan Food Bhd
FROZEN food manufacturer Kawan (Fundamental: 3/3, Valuation: 1.1/3) is a beneficiary of the weaker ringgit and lower commodity prices, which should boost its margins.
The recent weakness in the ringgit is a boon for Malaysian exporters — enhancing their earnings and export competitiveness. Kawan in particular, exports well over half its products. In addition, food manufacturers like Kawan will also benefit from lower costs, as agriculture prices have fallen sharply following China’s slowdown fears.
To recap, Kawan is a leading manufacturer and exporter of frozen food in Malaysia. The company’s products, including paratha, chapatti, naan, spring roll pastry and baked breads, are sold under the brands of Kawan, KG Pastry, Veat and Passion Bake.
Exports, mainly to the US and denominated in USD, accounted for a significant 58.1% of total sales in 2014, up from 54.7% in 2013. This ratio increased further to 61.6% in 1H2015.
Kawan should also benefit from lower global commodity prices. For instance, prices of wheat — a key raw material — have fallen by 25% over the past 12-months.
For 1H2015, net profit increased by an outsized 33.9% y-y to RM12.8 million, driven by stronger consumer demand and foreign exchange gains. Sales, meanwhile, rose 8.7% to RM81.6 million, due mainly to higher export sales.
Future growth will be underpinned by its capacity expansion exercise — to be completed by end-2015 — which will see overall production capacity increase by a significant 250% to 35 million kg per year.
With strong annual operating cash flows of RM27.3 million and net cash of RM32.8 million, equivalent to 16.1 sen per share; funding of the RM98.7 million capex programme should not be an issue. The company also plans to borrow RM40 million to part finance its capex.
The stock currently trades at a trailing 12-month P/E of 22.7 times and 2.9 times book. We expect earnings to grow by a three-year CAGR of 20%, which suggests its FY2017 P/E will compress to an attractive 15.1 times.
