KUALA LUMPUR (June 17): Analysts have maintained their positive calls on Kawan Food Bhd as they believe frozen food demand remains robust and the temporary operation suspension is expected to have minimal material impact on the group.
In a note today, Public Investment Bank Research said: "We gather that demand for frozen food is still robust, especially in Malaysia, thanks to tightening of the movement control order (MCO) restrictions, which encourages consumers to stock up on frozen food.
“In addition, we expect exports to rise in tandem with Kawan Food’s strategy in penetrating new export markets. We understand that the group is seeking to grow its presence in North America, South America and Europe."
It noted that Kawan Food’s one-week closure ordered by the Ministry of Health (MoH) following Covid-19 positive cases among its workforce would have minimal impact on the group’s earnings.
“A one-week closure from June 14 to June 21 is unlikely to have a material impact on Kawan Food’s earnings, given that the group has a sufficient inventory and will be able to increase production with extended shifts upon recommencement or diverting its production to its manufacturing base in China.
“We estimate that for every one-week closure, Kawan Food’s earnings would fall by about 2%,” it added, maintaining its "outperform" call and target price (TP) of RM3 for Kawan Food.
CGS-CIMB Research, meanwhile, also maintained its “add” call on Kawan Food based on strong demand for its products, but with a lower TP of RM3 from RM3.58 previously to reflect “a tougher operating environment”.
Going forward, CGS-CIMB said, Kawan Food expects strong demand for its products to be sustained in both the export (56.3% of revenue for the financial year ended Dec 31, 2020 [FY20]) and domestic (43.7%) markets.
“Kawan Food posted a 13.3% year-on-year (y-o-y) export sales growth in FY20, driven by higher demand from existing clients (primarily traditional retailers) and new client acquisitions (modern trade).
“Locally, sales grew by 31.7% y-o-y in FY20, driven by higher sales to retail-based clients, attributed to higher in-home food consumption and improved brand awareness,” the research house added in a report yesterday.
It noted that the group estimates a decline in its utilisation rate due to the workforce restrictions under the MCO and the temporary suspension of operations.
“Kawan Food estimates that its 2QFY21 (second quarter ending June 30, 2021) utilisation rate will decline slightly quarter-on-quarter (q-o-q) (we estimate it to be 45% to 50% versus 53% in 1QFY21).
“As Kawan Food has a strong order backlog, it intends to offset any production loss during the suspension period by extending shifts upon recommencement of production,” he added.
CGS-CIMB cut its FY21-23 earnings per share (EPS) forecasts by 5.6%-7.3% for the group, accounting for the lower utilisation rate and higher input cost.
“Accordingly, our TP is lowered to RM3, based on 24 times CY22 (calendar year 2022) price-earnings ratio (P/E) (the five-year mean) from 27 times previously. The lower P/E multiple is to reflect the tougher operating environment (the MCO restrictions and higher input cost),” it noted.
At the time of writing today, Kawan Food’s share price remained unchanged at RM1.98, valuing the group at RM711.85 million.