Kawan Food Bhd
(June 8, RM2.55)
Initiate coverage with a target price of RM3.65: Kawan Food (Kawan) is Malaysia’s largest frozen flour products producer with its main products being roti paratha, chapatti and spring roll pastry. 

The domestic market makes up the largest share of the group’s revenue at 40%, while the United States is its largest export market at 30% of group revenue. 

Kawan is currently constructing a RM100 million factory in the Selangor Halal Hub (SHH) in Pulau Indah, off Selangor. When ready by year-end, the new freezer warehouse would be five to six times larger than its existing factories in Shah Alam, Selangor.

The management is banking on the new facility to help it target new markets and develop new products. 

The company is funding the plant’s construction via internal funds and from warrant conversions. 

While it took Kawan six years to double its revenue from 2008, we expect the company to be able to double its revenue again in the next three years, thanks to its new production facility. 

If successfully secured, the tax incentives of setting up operations in SHH could result in minimal taxes being paid in the next three years, boosting the bottom line. 

Kawan’s business is resilient and tends to thrive during periods of difficult economic conditions as more consumers choose to eat at home rather than dine out. Export sales, mostly in US dollar, make up about 60% of revenue, while raw materials like flour are mostly denominated in ringgit. As such, a weaker ringgit is favourable to the company.

Compared with its food and beverage (F&B) peers, Kawan’s valuation is attractive at a 2016 price-earnings ratio of 14.6 times, the lowest among our F&B stock coverage.

In addition, Kawan’s 40% three-year earnings per share compounded annual growth rate is the highest in the industry. — CIMB Research, June 8

This article first appeared in The Edge Financial Daily, on June 9, 2015.