• Upgrade to BUY (TP: RM2.00). Kawan Food’s (KFB) 1HFY24 core net profit of RM19.1mn (+31.0% YoY) was in line with our and consensus expectations, accounting for 53% and 52%, respectively. In 2QFY24, revenue grew by 14.2% YoY, driven by higher sales from European (+69.6% YoY) and North American (+39.2% YoY) markets. Core net profit surged by 37.6% YoY, supported by higher sales and lower overall operating costs. We are positive on KFB's outlook, driven by stable demand for frozen food products, recovery in exports, and lower raw material costs due to expected weak wheat prices. With a potential upside of 17% from our TP, we have upgraded the stock to a BUY with a TP of RM2.00, based on 18x PER (KFB’s -0.5SD 5-years average forward PE) pegged to FY25f EPS of 10.9sen.

• Key Highlights. 2QFY24 revenue increased by 14.2% YoY, mainly driven by higher sales from the European (+69.6% YoY) and North American (+39.2% YoY) markets. Core net profit grew robustly by 37.6% YoY, thanks to the overall increase in revenue and lower operating costs, leading to an improved profit margin of 12% (+2 ppts YoY). However, on a QoQ basis, core net profit fell by -10.5% as local demand softened following higher festive-related purchases in the previous quarter. Sales in the local market dropped by -21.5% QoQ, while the growth in the European market remained strong, increasing by +52% YoY.

• Earning Revision. No change to our forecast.

• Outlook. Looking ahead, we expect improved sales, supported by strong demand from both local and export markets, especially in Europe and North America. Additionally, new products, such as Roti Boom, are gaining traction. Margins are expected to remain stable due to lower raw material prices, particularly wheat which is expected to trend lower, coupled with a favourable USD/MYR exchange rate.

Source: BIMB Securities Research - 21 Aug 2024