Buoyed by strong demand
? We reiterate our positive view on Kawan’s prospects, backed by strong demand for its products, selling price hikes, and higher production volume.
? We expect ongoing price hikes as well as greater economies of scale to drive margin expansion in FY22F, despite rising input costs.
? Valuations are undemanding at 13x CY23F P/E (48% discount to its 5-year mean P/E). Reiterate Add, with a TP of RM2.50 (20x CY23F P/E).
FY21: Strong bottomline growth despite lower sales volume
? Kawan shared that the 15.5% increase in FY21 core net profit to RM32.1m was driven by ongoing cost optimisation strategies and lower marketing costs. This was despite a 1.2% drop in FY21 revenue due to impact of export customers deferring orders and lower production volume (impact of lockdown restrictions).
? In 4Q21, the 5.2% qoq rise in revenue was driven by higher export sales (+28.7% qoq). This also led to 4Q21 EBITDA margin rising 3.6% pts qoq to 25%, on the back of profitable sales mix (export sales have higher margins) and greater economies of scale. Selling price hikes in order to pass on higher input costs
? Kawan shared that it has raised its selling prices on average by 7-8% since early 1Q22, which will be fully reflected across its entire clientele by 2Q22. In our view, this will help to pass on the recent increase in raw material costs (estimated to be 45-50% of its total cost in FY21). Hence, we believe this will support margin expansion in FY22F.
? Nevertheless, Kawan is not discounting further price hikes if input costs continue to rise from current levels. Among its raw material requirements, we also note that Kawan has forward purchased its flour requirements up to end-2Q22 and margarine requirements up to end-1Q22.
Targeting RM300m topline in FY22F from higher product demand
? For FY22, we gather that Kawan is targeting a topline of RM300m (19.1% growth; 1.3% above our revenue forecast for FY22F). This will mainly be driven by higher demand from existing customers as well as from new client acquisitions. According to Kawan, it expects to secure three new US-based customers in 1H21, which should contribute RM20m to its topline (equivalent to 7.9% of FY21 revenue, and 41.5% of its targeted revenue growth in FY22F).
? The company also plans to continue launching more products, including products in the plant-based category. These new products are expected to drive higher sales in the hotel, restaurant & café (HORECA) segment, as well as to cater for the larger consumer crowd.
Boosting production volume via increase in workforce size
? Kawan shared that it has applied to the government for 400 new workers to boost its operations (55-50% utilisation rate in 2021). We understand that Kawan currently has an estimated 350 workers, which is a combination of permanent and contract workers. Assuming that it is able to secure all 400 new workers (targeting 2H21), Kawan aims to optimise usage of contract workers (less consistency and higher wages) which will aid margin expansion.
Retain Add with a TP of RM2.50
? We keep our Add call with a TP of RM2.50, based on 20x CY23F P/E, in line with its current 5-year historical mean. We like Kawan for its undemanding valuations (trading at 12.8x CY23F P/E, a 61.8% discount to the overall consumer sector’s average CY23F P/E of 41.4x) and robust EPS growth of 17% 3-year (FY21-24F) CAGR.
? Re-rating catalysts: Stronger-than-expected export revenue and margin expansion from higher economies of scale. Downside risks: lower-than-expected export sales and/or a sharp increase in operating expenses.