• Maintain HOLD (TP: RM2.00). Kawan Food’s (KFB) 9MFY23 core net profitof RM23.1mn (-23.1% YoY) was in line with ours and consensusexpectations, accounting for 73% and 75% respectively. In 3QFY23, KFB’srevenue surged to RM79.2mn (+17% QoQ, +10% YoY), driven by a recoveryin overseas sales (+44.5% QoQ, 18.6% YoY). Nevertheless, core net profitfell by 16.9% YoY due to higher selling and distribution expenses, as well ashigher effective tax rate, resulting to a 3.6 ppts decline in the profit marginto 10.9%. Moving forward, despite stable sales growth from the exportmarket, we remain cautious on cost pressures due to the elevatedUSD/MYR currency exchange rates and the anticipation of higher rawmaterial as well as Advertising & Promotions (A&P) costs. Maintain a HOLD call with an unchanged TP of RM2.00, pegged at 20x PER to FY24F EPS of 10sen.

• Key highlights. KFB’s 3QFY23 revenue surged to RM79.2mn (+17% QoQ,+10% YoY), propelled by a recovery in overseas sales (+44.5% QoQ, 18.6%YoY), which helped offset the decline in local sales (-8.7% qoQ, -0.4 YoY).Sales growth in the export market was led by North America (+59.4% QoQ,+3.3% YoY) and the Rest of Asia (+58.3% QoQ, +8.7% YoY). This growth islikely attributed to securing new export clients. Core net profit of RM8.6mnfell by 16.9% YoY mainly due to higher selling and distribution expenses.However, compared QoQ basis, core net profit increased by 31.7%, aligningwith higher revenue and lower operating expenses (i.e marketing) duringthis quarter.

• Earnings Revision. No changes.

• Outlook. Looking ahead, we anticipate a steady sales driven new exportclients and the new product offerings. However, we remain cautious onpotential cost pressures that could impact margins. This concern isprimarily attributed to the elevated USD/MYR currency exchange rates andthe projected higher commodity prices, such as wheat and raw sugar.Additionally, we expect increased spending on A&P due to heightenedcompetition in the market.

Source: BIMB Securities Research - 23 Nov 2023