Kawan Food Bhd

ESTABLISHED more than 30 years ago, Kawan (Fundamental: 3/3, Valuation: 1.1/3) is, today, a leading manufacturer and exporter of frozen food in the country.

The company produces an extensive range of products that includes paratha, chapatti, steamed buns, soy protein bites and bakery products. Popular brands under its stable are Kawan, KG Pastry, Veat and Passion Bake.

We favour Kawan for its steady, resilient growth. Sales grew consistently over the past five years, recording a CAGR of 12.9%. Export, is a key driver, accounting for 58% of total sales of RM149.5 million last year. In particular, North America, which contributes more than half of export revenue, increased 32% y-y in 2014.

Kawan has kept margins fairly stable, at an average of 13.6% between 2010 and 2014. For 1QFY15, net profit increased 33% y-y to RM5.5 million, driven by stronger consumer demand and favourable foreign exchange rate movements.

Looking ahead, Kawan should benefit from the weaker ringgit as well as lower global commodity prices. For instance, prices for wheat — one of its key raw materials — have fallen by 8% over the past 12-months.

Kawan plans to spend RM100 million for capex over the next 2-3 years. It intends to consolidate two existing factories — situated in Shah Alam — to a 15-acre site in Pulau Indah, Port Klang, which is almost 5 times the combined size of both existing factories. The new factory will cater to growth for the foreseeable future.

In addition, Kawan’s steady cash flow from operations and net cash of RM34.7 million, should comfortably fund its expansion needs and maintain steady dividends. Dividends totaled 5.4 sen in 2014, including special dividend of 3.6 sen. Interim dividend for 2015 stood at 2 sen per share.

The stock is currently trading at trailing 12-month P/E of 21.9 times — well below net profit growth of 29% over the same period.

This article first appeared in The Edge Financial Daily, on July 14, 2015.