KENANGA RESEARCH Results Note

25 August 2010

BUY Kawan Food

RM1.40
Target Price: RM1.60
1H10 slightly below expectations
Stock data l Kawan Food’s (KFB) 1HFY10 net profit of RM6.5m came in within
market consensus but slightly below our expectations, constituting
Market cap (RMm): 168.0
Issued shares (m): 120.0
43.6% of our FY10 estimate of RM14.9m and 54.16% of consensus
52-week range: RM0.765-RM1.67 forecast of RM12m.
3-mth avg daily volume: 45,283 shrs l YoY, 1H10 net profit has declined by 1.8% due to the depreciation of
Bloomberg code: KFB MK the US dollar, though this is being offset by the slight improvement in
YTD price chg: +8.5% revenue growth of 1.1%, supported by strong sales growth in the domestic
YTD KLCI chg: +10.4% market (14.2%), Europe (5.5%) and North America (6.1%), while Asia
Est. free float: 7.8% (excluding Malaysia) registered a decline of 4.7% and Oceania a 9.7%
Major shareholders: lower revenue.
Gan Thiam Chai: 33.3%
Kilat Kaca S/B: 24.0% l QoQ, KFB registered a lower turnover by 1.3% while PBT declined to
Gan Thiam Hock: 8.4% RM4.15m due to lower sales and weaker demand generated in 2Q10. The
Kwan Sok Kay: 8.4% improvement in economy and the increase in purchasing power do not fare
KLCI FBM30 FBM70 Syariah Hijrah well for KFB, as consumers in developed countries opt to dine out.
No No No No No Consequently, EBIT margin declined to 18.1% from 19.3% and we believe
Consensus this is due to the higher costs of raw materials.

FYE 31 Dec 2010E 2011E l Earnings estimate for FY10 and FY11 remain unchanged. We
Net profit (RMm): 14.7 17.0 anticipate stronger 2HFY10 earnings as new capacity from the Nantong,
EPS (sen): 12.0 14.5 China and new Shah Alam plants comes on-stream, in addition to festive
Forecast revision seasons to stimulate demand.
FYE 31 Dec 2010E 2011E l Maintain BUY recommendation with target price of RM1.60 based on
Prev. net profit (RMm): 14.9 17.7 the same 13x PER applied to revised FY10 EPS of 12.4 sen. We believe
Revision (%): - - that the Nantong and new Shah Alam plants could become earnings
Net profit (RMm): 14.9 17.7 contributor sooner than initially expected (FY11) due to the ready demand
Share price chart from KFB’s existing export markets. KFB’s existing Shah Alam plant is
already running close to full capacity.

The Research Team Tel: 603-2713 2292

research@kenanga.com.my

Results Highlights
FYE: 31 Dec QoQ YoY YTD
(RMm) 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 Chg YoY Chg 1H09 1H10 Chg
Revenue 22.7 23.7 20.3 23.2 22.9 -1.3% 1.1% 43.6 46.1 5.7%
EBIT 4.9 5.0 4.5 4.6 4.2 -9.5% -14.0% 8.9 8.8 -1.1%
Finance costs (0.2) (0.1) (0.1) (0.1) (0.1) 3.5% -15.4% (0.3) (0.3) -11.4%
Pretax profit 4.7 4.8 4.4 4.5 4.0 -9.9% -14.0% 8.6 8.5 -0.7%
Taxation (1.2) (1.9) (0.1) (1.3) (0.9) -29.3% -23.2% (2.1) (2.2) 1.0%
Net profit 3.5 2.9 4.2 3.2 3.1 -2.4% -11.6% 6.5 6.3 -1.8%
Basic EPS (sen) 3.0 2.4 3.5 2.7 2.6 -2.4% -11.6% 5.4 5.3 -1.8%
DPS (sen) - - - 1.4 - 100.0% 100.0% - - -
EBIT margin 0.64 0.66 0.69 0.70 0.72 3.5% 13.3% 0.6 0.66 14.9%
Pretax margin nm nm nm nm nm - - - nm -
Net margin 21.4% 21.0% 22.0% 19.9% 18.2% -1.6% -3.2% 20% 19.0% -1.3%
Effective tax rate 20.7% 20.4% 21.5% 19.3% 17.6% -1.7% -3.1% 20% 18.4% -1.2%
PP7004/02/2011(029201)
Segmental Breakdown
FYE: 31 Dec (RMm) 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 QoQ Chg YoY Chg 1HFY08 1HFY09 YoY YTD
Chg
Segmented Revenue
M'sia 7.2 10.0 9.7 9.3 7.6 -18.1% 6.1% 14.8 17.0 14.2%
Asia (excl. M'sia) 3.6 3.7 2.2 2.5 3.8 48.9% 4.8% 6.6 6.3 -4.7%
Europe 3.5 3.6 1.4 3.1 3.4 9.3% -3.4% 6.1 6.4 5.5%
North America 6.9 4.2 5.8 7.0 6.6 -5.9% -4.2% 12.8 13.6 6.1%
Oceania 1.5 2.2 1.1 1.3 1.6 21.5% 3.7% 3.2 2.9 -9.7%
Africa - (0.0) 0.0 - - 0.1 -
Group Revenue 22.7 23.7 20.3 23.2 22.9 -1.3% 1.1% 43.6 46.1 5.7%

Results Review
YoY (RMm) 1HFY10 1HFY09 Chg Comments
Revenue 46.1 43.6 5.7% Due to higher sales in all markets
compared to 1H09.
Net profit 6.3 6.5 -1.8% Largely due appreciation of the dollar.

QoQ (RMm) 2QFY10 1QFY10 Chg Comments

Revenue 22.9 23.2 -1.3% Lower sales and weaker demand for frozen
food due to improvement in economy and
increase in purchasing power
Net Profit 3.1 3.2 -2.4% Appreciation of the dollar.

Earnings Estimates
FYE: 31 Dec (RMm) 2008 2009 2010E 2011E 2012E
Revenue 75.2 87.6 99.8 114.9 132.0
EBIT 12.4 18.3 20.0 23.7 27.7
Pretax profit 12.1 17.7 19.8 23.5 27.6
Net profit 9.5 13.6 14.9 17.7 20.7
EPS (sen) 7.9 11.3 12.4 14.7 17.3
EPS growth (%) 14.9% 43.0% 9.6% 18.7% 17.4%
DPS (sen) 1.9 - 1.4 1.8 1.8
NTA/ share (RM) 0.60 0.69 0.82 0.95 1.10
Net gearing (x) nm nm nm nm nm
PER (x) 15.2 10.6 9.7 8.2 7.0
P/ NTA (x) 2.0 1.7 1.5 1.3 1.1
Div. yield (%) 1.6% 0.0% 1.2% 1.5% 1.5%
EV/ EBITDA 8.6 6.1 5.0 3.8 2.1
ROE (%) 13.3% 16.3% 15.2% 15.6% 15.7%

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Kawan Food – 25 August 2010 Page 2 of 2