After adjusting for unrealized forex loss of RM11.3m and other non-core items, Kawan Food Bhd (Kawan)'s 3QFY24 core net profit came in at RM12.7m (+64% YoY). The stronger set of results was mainly driven by an increase in sales to Europe and North America markets. Cumulative 9MFY24 core net profit of RM31m was above our and consensus estimates, accounting for 82% and 86% of our full-year estimates respectively. The discrepancy in our results was mainly due to lower-than-expected operating cost, given the better operational efficiency and lower raw material costs. Therefore, we raise our earnings forecast for FY24-26F by an average of 13% after cutting our operating cost assumptions. We are still optimistic on Kawan's future prospects, premised on robust demand for frozen food, given the convenience and affordability of frozen food. We reiterate our Outperform call with a higher TP of RM2.45 based on 17x FY25F EPS (average of its 3-year forward PE). Kawan declared a second interim dividend of 2.8sen, bringing the YTD dividend declared to 7sen, translating to an attractive dividend yield of 4.2%.

• 3QFY24 revenue grew 10.9% YoY to RM83.8m, underpinned by stronger sales from the export market especially to the Europe (+65.9% YoY) and North America (+25.4% YoY) markets. The increase in export sales had helped to cushion the softer local market, which saw its revenue decreased by 3% YoY.
• 3QFY24 core net profit jumped 64% YoY to RM12.7m. Kawan reported a headline net profit of RM1m (-87.5% YoY) due to unrealized forex loss. After adjusting for exceptional items, Kawan's core net profit came in at RM12.7m. The stronger performance was likely driven by better operational efficiency coupled with lower raw material costs (eg wheat). As a result, Kawan's GP margin increased by 4.9 ppts YoY to 35.5%.
• Outlook. We foresee Kawan to post stronger earnings in 4QFY24 on greater festive spending and new product launches. Additionally, we believe that it will also be supported by the recent strengthening of the USD and lower wheat prices. In the longer run, we continue to remain optimistic on Kawan's future prospects, underpinned by robust demand for frozen food given the rising consumer preference towards frozen food for convenience and its more affordable price tag.

Source: PublicInvest Research - 21 Nov 2024