Kawan Food to have stronger 2H on higher utilisation rate, exports

The leading frozen food manufacturer plans to grow its export sales by penetrating new markets in Europe, N. America and S. America 

By ANIS HAZIM / Pic source kawanfood.com

KAWAN Food Bhd is expected to record better earnings in the second half of 2021 (2H21) after missing expectations in the latest quarterly results due to weaker sales. 

The leading frozen food manufacturer could have a higher utilisation rate of between 55% and 60% for the upcoming quarters in tandem with its stronger order backlog from local and export customers, according to CGS-CIMB Securities Sdn Bhd analyst Walter Aw. 

This is in contrast to Kawan Food’s estimated utilisation rate for its second quarter ended June 30, 2021 (2Q21), which declined to 35% from 53% in 1Q21, due to workforce capacity cap from the re-implementation of Movement Control Order and the two-week suspension of operations due to Covid-19 cases among its workers. 

Aw said Kawan Food is also confident of growing sales via onboarding of several new hotels, restaurants and cafes (horeca) customers. 

“Also, Kawan Food plans to grow its export sales (51.6% of 1H21 revenue) by penetrating new markets, such as European countries, and securing more distributors in its key export market, the US,” he wrote in a research report on Wednesday. 

Regardless, he noted that sales from horeca only account for less than 5% of 1H21 revenue. 

In view of the weaker-than-expected 1H21 results, CGS-CIMB has lowered its financial year 2021 (FY21) to FY23F (forecast) earnings per share (EPS) by 15.3% to 16.9% to account for slower export sales, higher raw material prices and reduced production. 

The brokerage also lowered its target price (TP) to RM2.50, according to a 24 times of the calendar year 2022 price-to-earnings (P/E) ratio and its five-year historical mean. 

CGS-CIMB kept its ‘Add’ call for Kawan Food, favouring the company’s strong earnings prospects, established brand name in the frozen bread market, and strong balance sheet with net cash standing at RM25.9 million as at end-2Q21.

Kawan Food shares closed unchanged at RM1.85 yesterday, valuing the company RM665.11 million. Aw noted that the group’s core net profit of RM14.8 million (7.5% year-on-year [YoY]) in 1H21 was below expectation, standing at 34% of its FY21F estimates and 39% of that Bloomberg’s consensus.

This was due to weaker-than-expected 2Q21 sales as a result of deferment of shipments for export sales due to global container shortage and production disruptions caused by two-week suspension of operations arising from Covid-19 cases. Its 2Q21 core net profit came at RM6.5 million, a decline by 28.1% YoY, after accounting for one-off losses of RM300,000.

The analyst wrote Kawan Food’s 2Q21 revenue and core net profit waned quarter-on-quarter (QoQ) by 15.8% and 19.6%, respectively, due to lower export sales, disruption to production leading to lower sales to local clients, Covid-19-related costs and lower economies of scale. 

Due to the weak 2Q21 results, its 1H21 revenue slowed 9.5% YoY and core net profit was down 7.5% YoY. 

The smaller quantum of decline in core net profit versus revenue was owing to a lower tax rate, which was reduced by 3.5% points YoY. 

Meanwhile, Public Investment Bank Bhd (PublicInvest Research) analyst Wong Ling Ling said Kawan Food’s 1H21 earnings were also below its forecasts, accounting for 40% of its full-year estimates. 

She said Kawan Food’s utilisation rate is expected to increase, supported by the increase in its workforce capacity to 80%-100% as the group targets to complete its employees’ second dose of vaccination by the end of August. 

PublicInvest Research has cut its FY21-FY23F by 6% to 9% to account for the lower utilisation rate and higher raw material costs. 

“Nevertheless, we are still positive on Kawan Food’s long-term prospects, underpinned by the robust demand for frozen food globally and Kawan’s plans to penetrate into new export markets in Europe, North America and South America,” Wong wrote in a research report yesterday. 

The investment bank maintained its ‘Outperform’ call for Kawan Food based on a 25 times P/E FY22F EPS, but it derived a lower TP of RM2.75, from RM3 previously.