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Kawan to ride on growing frozen food demand

Kawan to ride on growing frozen food demand

15 Jan 2021

Net profit margin to recover on cost optimisation efforts

The history of Kawan Food Bhd dates back to the 1960s when the family of Gan Thiam Chai made and sold pastries such as “pau, spring roll and kuih.’’

All these were made manually then. It was only in the 1970s that he started a smallish outfit known as Kian Guan Trading Co and from there continued to expand the range of its products and supplied them to local grocers and supermarkets.

Kian Guan was subsequently renamed Kawan Food Bhd – now one of the major suppliers of frozen food.

Its products are also found in various supermarkets and grocery stores locally and in 36 countries globally. Its major export markets include the United States, the United Arab Emirates and the United Kingdom. Kawan was listed on Bursa Malaysia in 2005.

Sadly, only three broking houses are tracking this stock although during the Covid-19 pandemic and the lockdowns, demand for its products rose not just locally but also globally.

Frozen food market in Malaysia is forecast to grow at a compounded annual growth rate (CAGR) of more than 7% over five years, a report said. By the end of 2023, the market size would be about Us$800mil.

Globally, Grand View Research forecasts the frozen food market to grow at a CAGR of 3.4% to Us$380bil from 2019 to 2027.

Kawan Food has come a long way from its humble beginning and it now has manufacturing plants in Pulau Indah, and Nantong in China. From merely selling “kuih bakul’’ to ‘’kulit popiah,” this company has expanded its product range since.

It is well known for its frozen ethnic food products. Its range includes paratha, spring roll pastry, frozen vegetable, chapati, finger food, bakery and desserts. They are sold under five brands – Kawan, KG Pastry, Passion Bake, Veat and Aman.

Publicinvest Research said flatbread or commonly known as paratha is the main revenue driver for Kawan, contributing about 45% of the group’s sales. Export sales account for 61% of Kawan’s export sales for financial year 2019 (FY19).

Overall, Publicinvest said the local market is the largest revenue contributor to Kawan, making up 39% of sales. North America is its largest export market, making up 27% of total revenue.

The house has forecast a three-year earnings CAGR of 59% on the back of the company’s capacity expansion and growing demand for frozen food.

“We believe this will be supported by the changing consumer’s preference towards frozen and convenient food and coupled with the Covid-19 outbreak, demand for longer shelf life food items are in favour,’’ it said.

Both Kawan’s plants have enough capacity to grow to cater for growing demand.

During the first movement control order (MCO) in the country, its Nantong plant reached 60% utilisation, the report said. Prior to the MCO, the utilisation rate was about 45%.

Going forward, retaining margins and continued expansion of its product range is key.

For that, the group is working towards cost optimisation efforts including installing a solar panel system and automation to streamline its business processes to cut cost, both which could lead to lower operating cost.

Though the capital expenditure (capex) for solar installation is Rm7.7mil, the savings in power bills over a period of time will be much more.

With cash reserves of over Rm51mil as at end September 2020, the company is not likely to seek external funding. Each year, it put aside nearly Rm20mil in capex maintenance.

Publicinvest said raw material costs accounted for about 38% of Kawan’s costs of goods sold.

In the past, its margins had been impacted by goods and services tax (FY16), foreign currency exchange losses (FY17), additional start-up cost for its plants (FY18), as well as higher labour cost and increase in depreciation cost from its new plant in Pulau Indah (FY19).

But the research house, which recently began tracking this stock, believes margins will be supported by Kawan’s ongoing cost optimisation efforts and higher utilisation rates.

It has forecast net profit margin to recover to 11.6%, 13.5% and 14.6% for FY20-FY22, respectively. This translates to Rm31mil, Rm39mil and Rm46mil, respectively.

Bloomberg consensus estimates of revenue is Rm269mil, Rm300mil and Rm330mil, respectively. Likewise, earnings per share is expected at 0.089 sen, 11 sen and 13 sen for FY20-FY22, respectively.

Of the three brokerages tracking the stock, two recommended “buy”, while the other has a “hold” call.

Although Kawan does pay dividends, it needs to formulate a formal dividend policy for investors to know what to expect in the future. Publicinvest has forecast a dividend per share of 4 sen (based on a 46% payout) which translates to a 1.9% dividend yield. As of FY20, the group has declared an interim dividend of 2.5 sen.

Year to date, its share price has risen 10 sen to close at RM2.14 yesterday. It has a market capitalisation of Rm769mil. The consensus 12-month target price is RM2.98 a share.

Frozen food will always be in demand with the people’s changing lifestyles and the need for conveniences. But the challenge is about maintaining freshness and authentic taste to a competitive marketplace.

Its peers in the local industry include Nestle (M) Bhd, Berjaya Food Bhd, QL Resources Bhd and Power Root Bhd.

Source: The Star

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