KAWAN ... Nov10

KENANGA RESEARCH

 Kawan Food’s (KFB) 9MFY10 net profit of RM10.2m came in within our expectations, constituting 68.5% of our FY10 estimate of RM14.9m.

 9M10 net earnings grew by a healthy 9.5% driven by better sales mix and higher sales volume. Overall revenue improved by 4.7% supported by strong sales growth in the domestic market at 13.6% and North America at 7.3%. However, European, Oceania and Asia ex-Malaysia market registered contraction of 5.2%, 13% and 1.7% respectively.

 QoQ revenue and earnings were also higher by 6.1% and 15.6% respectively boosted by seasonal factor and contribution of new plant in Shah Alam and Nantong, China. We also anticipate stronger 4QFY10
earnings as new capacity from the Nantong, China and new Shah Alam plants comes on-stream, in addition to festive seasons to stimulate demand. QoQ EBIT margin is also better at 23.9% compared to 18.8% in
previous quarter, mainly better economies of scale resulted from higher sales volume.

 Earnings estimate for FY10 and FY11 remain unchanged. Given the positive numbers in the current quarter, we are maintaining our FY10 and FY11 earnings forecast at RM14.9m and RM17.7m respectively. In addition balance sheet remains strong with net cash per share of 14 sen.

 Contribution from new plants. We believe that the Nantong and new Shah Alam plants could become earnings drivers for FY11 given the strong export demand as KFB’s existing Shah Alam plant is already running close to maximum utilisation rate. Going forward, KFB has set priority to develop the domestic China market and will develop and launch more innovative products that could cater for different market segments.

 Target price revised upwards to RM1.77 as we roll over our valuation to FY11 EPS of 14.8 sen based on the sector’s 5 years average PE band of 12x PER. With potential upside of 26%, we are maintaining our BUY recommendation on KFB.