KAWAN FOOD BHD

Target price: CGS-CIMB has a positive view on Kawan Food’s new factory in Pulau Indah, Selangor, saying that “we view this positively as the market recognises Kawan Food’s management and its product quality”.

Kawan Food has been in talks with foreign food and beverages (F&B) companies for it to produce products for sale outside Malaysia.

CGS-CIMB believes that Kawan Food could start OEM manufacturing for some foreign F&B companies from 2019 onwards, as exports form 60% of the group’s revenue.

After a delay of more than 18 months, the new factory (which will have a roti paratha and chapati production capacity triple that of its existing factory in Shah Alam) finally started commercial production in July.

Kawan Food is also adding a brand new production line, which has an output three times that of its existing line. The new line is still being commissioned and is slated to be completed in the next one to two months.

The old factory had been operating at full capacity over the past two years, resulting in flattish revenue for the group.

Kawan Food plans to start selling its snacks (mainly rice-based) in retail stores from the first quarter of 2019.

CGS CIMB said it has yet to assume potential earnings from this division.

The research firm maintains its forecasts and target price based on 2020 forecast price-earnings (P/E) of 17.5 times, which is at a 30% discount (previously 20%) to its 25 times P/E target for the F&B sector.

The larger discount is to reflect Kawan Food’s small market capitilisation.

“We like the stock as we anticipate 76% earnings per share growth in 2019, driven by higher export sales and strong US dollar/ringgit exchange rate, and that it trades at an attractive forecast 13.8 times 2019 P/E, below the sector’s average of 25.6 times,” analysts said.

Strong export revenue, especially from the US, is a potential re-rating catalyst, with the downside risks involving rise in raw material prices and weak export sales to the US.