Kawan sees resilient overseas demand

Soaring export sales to drive growth

FROZEN food manufacturer Kawan Food Bhd expects the strong overseas demand to persist as its customers abroad continue building on their inventories following supply chain issues that bogged them down earlier.

The group’s net profit in the second quarter of 2022 (2Q22) grew 72.63% to Rm10.84mil from Rm6.28mil in 2Q21, beating some analysts forecasts. This was on the back of higher sales in the local and export markets.

Chief executive officer Ng Hooi Khai says while domestic sales did see a slowdown in 2Q22 after the Hari Raya Puasa festivities, export sales continued to be bullish.

For the first half-year, the number of containers for export products rose by 24% from a year earlier, he points out.

“Due to the supply chain disruption that occurred in the last few quarters, many of our customers saw a decline in their inventories.

“As the situation is easing now, customers are taking the opportunity to purchase more goods for restocking,” he adds.

He also says that the weakened ringgit, to a certain extent, helped boost export sales.

Like most other food manufacturers, Kawan Food has to contend with rising raw material costs. But Ng says the group is in no hurry to raise prices.

“Given the bearish market sentiment, we will not implement price hikes this year and will contain cost pressures through higher productivity and stock-keeping unit (SKU) rationalisation.

“We have decided not to burden our customers with another round of price increase at this point. Our use of automation has ensured us of good productivity, which we hope will also gradually reduce our reliance on labour,” he says.

Ng says the group now has about 300 SKUS in the market and is streamlining its products to place more focus on those that are faring better.

“This is one of the growth strategies that we will take in the coming quarters,” he says.

Ng says the group is taking strides to improve business relations with its customers in the United States and Europe.

One of them being its membership in the Roundtable on Sustainable Palm Oil (RSPO) last year that has since been paying off.

“Being a member of the RSPO helps to strengthen our customers’ trust towards us.

“As a RSPO member, we need to adhere to proper standards in the way we conduct our business to make sure that we are operating sustainably,” he says.

Social compliance

On top of that, the group is in the process of obtaining a certification on social compliance this year.

Kawan Food expects its customer base to expand once such certification is completed.

However, Ng says while automation is able to minimise labour issues, it is not possible to do away with manual labour completely.

As such, the group is expecting 400 foreign workers to come in over the next four months. This would alleviate the labour shortages that it has been facing.

“One of the reasons that we have pushed back the launching of some of our products was due to the delays we faced in obtaining the approval for foreign workers.

“We have received the first batch of 37 workers last week and are expecting another 400,” says Ng.

On the issue of raw materials, the group continues to feel headwinds from uncertainties like volatile crude palm oil pricing and the ongoing Russia-ukraine war.

He says one of the main raw materials used in its production is palm oil as the group needs it to make margarine and paratha.

“While we saw some price adjustments as a result of lower crude palm oil prices in June

this year, the cost reduction was not as big as we had expected.

“The reason being the upstream suppliers of the palm oil industry are also stocking up their inventories.

“Other than palm oil, we are expecting an uptrend in the prices of flour as long as the conflict between Russia and Ukraine con tinues,”ngsays.

Meanwhile, he says freight rates to the US is seeing increases although rates to other routes are dropping slightly by 7% to 10%.

“In our shipment, almost 99% of goods are under the free-on-board agreement. This

eases any risks that we might face in footing additional freight costs,” he says

New plant

Challenges aside, the group should benefit from its new plant and warehouse.

“During the Covid-19 pandemic last year, our operations in the Pulau Indah facility had to shut down for 10 days. At that time, we had about one to two months of SKU that were unable to be shipped out.

“This, coupled with the floods that have been occurring this year, prompted us to set up a satellite plant and Shah Alam was a strategic location. We have plans to build a plant and a warehouse at the site,” Ng says.

Meanwhile, the group also has made a small foray into the fast-food sector via its partnership with homegrown fast-food chain Kejap Food.

Kejap Food, in which Kawan Food acquired a 32.5% stake earlier this year, describes itself as the first truly Malaysian drive-through outlet.

It currently have four outlets in the Klang Valley, two of which are at petrol stations selling local delights such as “teh tarik”, “nasi lemak” and curry puffs. Kawan Food sells ingredients to these outlets.

“This year, we are launching our products in two new Kejap Food outlets and there are more new developments in the pipeline for this segment,” he adds.

Meanwhile, CGS-CIMB Research opines that exports will continue to drive sales for Kawan Food.

“Heading into the second half of 2022 (2H22), we gather that Kawan Food expects stronger momentum in export orders, in addition to continuous strong demand from its existing customers, which it is confident will sustain over the next six to nine months.”

The research house points out that Kawan Food has secured new customers such as large-scale US retailers, with maiden deliveries targeted from the end of 3Q22.

In terms of labour, CGS-CIMB says the passing of the social compliance audit would not only attract more potential customers but will improve Kawan Food’s margins.

“Kawan Food is preparing to undergo a social compliance audit by a third-party auditor to meet its potential customers’ requirements on social compliance, mainly for mainstream customers in the US.

“It believes that passing the social compliance would bring in more orders and better margins, as customers will be willing to pay a premium for food and beverage goods from companies that passed a social compliance audit,” CGS-CIMB says.

“Being a member of the RSPO helps to strengthen our customers’ trust towards us.”

Ng Hooi Khai