CBRS: Kawan Food - HOLD - 15 Aug 2008

CBRS: Kawan Food - 1HFY08 results below expectations (Results Note)



Price: RM0.58

Target Price: RM0.65

Recommendation: HOLD



· Kawan Food Berhad's (KFB) annualised 1HFY08 net profit of RM7.3m is below our forecast and that of consensus by 12% and 10% respectively. Higher cost of raw materials, fuel and energy, as well as a stronger Ringgit has put a squeeze on profit margins. However, we anticipate a stronger 2HFY08 in-line with sales seasonality and stabilising of commodities prices and currency exchange rate.

· Challenging environment of high input costs and stronger Ringgit. YoY, 1HFY08 revenue increased by 19% driven by strong double-digit sales growth in Malaysia and Asia. However, EBIT only increased by 9% YoY (EBIT margin declined by 1%) under pressure from higher raw materials (flour in particular), fuel and energy costs, as well as the weaker USD. (Approximately 90% of KFB's foreign sales are USD-denominated.) Pretax profit in 1HFY08 increased by 11%, partially mitigated by lower finance costs.

· YoY, 2QFY08 net profit increased by 56%, driven by 30% rise in revenue from higher sales in Asia, Malaysia and North America. Pretax profit in 2QFY08 rose by 66% due to the moderation of commodities prices and lower finance costs.

· Higher sales QoQ in all markets except for Malaysia and Africa resulted in a 16% increase in 2QFY08 revenue. 2QFY08 pretax profit increased by a more-than-proportionate 71% due to exceptionally high raw materials prices in the previous year.

· Maintain earnings estimates for FY08 and FY09 in anticipation of better performance in 2HFY08 in-line with seasonality (higher sales are expected in 3QFY08 because of the Hari Raya festivities) and moderation of commodities prices.

· Maintain HOLD recommendation and target price of RM0.65. Our target price is derived from applying 9x PER (at 30% discount to local industry average FY08 PER of 13x) to FY08 EPS of 6.9 sen. Potential risks to our forecast are slowdown in consumer spending, and any sudden hikes in raw materials costs.