Performance not affected by unfilled CEO post
Ng Wai Mun 
Q2 FY17 revenue declined marginally by 0.7%

KAWAN Food Bhd, which has enjoyed commendable revenue growth of between 10% and 18% per annum over the past four years, saw its share price hit a five-year high of RM3.80 on July 5 – a 41% jump from a year earlier.

However, its share price has fallen since Aug 18 when it released its latest financial results. It closed at RM3 on Nov 23.

Some investors suggest the decline is the end result of not having a CEO for the past two years, following the resignation of Jon Fang Nee Choong who served in that position from March 2010 to August 2015.

While Kawan Food managing director Timothy Tan confirms the position had not been filled since Fang left, he says he took on the latter role since early 2015.

“We recorded growth in both 2015 and last year,” he tells FocusM.

A market observer doubts the price decline is caused by the absence of a CEO.

Referring to Tan, she says: “A managing director was appointed in April 2015 prior to the CEO’s departure in August.

“Different titles perhaps, but managing director and CEO typically mean the same thing. Both are operational leaders of a company.”

She says the company is fundamentally sound. “I describe Kawan Food as being a victim of its own success.”

She believes it is a case of the counter being overbought and then now being oversold.

“From end-last year until its high on July 5, the price appreciated by 33%. The [KLCI] index only increased 8% [for the same period].

“When it started to fall, it fell so much that its price earnings ratio (PER) is now low,” she says. Since July 5, the price dipped by 20% while the index fell 2.5% only.

It is believed that since August 2015, the CEO’s work has been distributed to the remaining senior management on supposedly temporary measures.

A minority shareholder says: “No doubt the management is in capable hands, but time is of the essence. And the quality of one’s time is now divided between one’s own work and having to oversee part of the CEO’s related tasks.”

Notwithstanding the CEO’s absence, the company is basically run by its executive chairman and largest shareholder Gan Thiam Chai.

He founded Kawan Food Manufacturing Sdn Bhd in 1984 – now a wholly owned subsidiary of Kawan Food Bhd.

With an executive chairman managing operations, observers argue that the absence of a CEO should not substantially affect the company’s performance.


Revenue dip

The shareholder notes that the company recorded a 13% revenue hike in H2 FY15, which is the period when Fang left.
This was followed by a higher 19% growth in H1 FY16.

“Following the departure, the end result of a CEO’s leadership doesn’t just stop there.

“Effects of the person’s guidance will still be exhibited in the results over the next couple of financial reporting periods.

“One should only feel the effect of such departures if left unfilled, a year or so later,” he says. And this appears to be the case.

In H2 FY16, Kawan Food reported a lower revenue growth of 7%, dipping to 6% in H1 FY17, the lowest since H1 FY13.

The shareholder says it is no coincidence its Aug 18 share price of RM3.53 was the highest since.

“It was the day Kawan Food released its H1 results. Its Q2 revenue declined marginally (by 0.7%),” he says.

Some investors attributed the decline to the lower Q2 revenue.

Following the results’ release, its share price declined for two consecutive days which led to its market capitalisation falling by 5%.

“The share price decline is linked to the results but not so much the lower Q2 numbers.

“A negligible [0.7%] revenue decline does not justify a 16% decline in the current price,” the shareholder says.

On the Q2 revenue decline, Kawan Food’s Tan says: “Our sales in Malaysia and China are still growing.

“However, a couple of the bigger export customers slowed down a little.”

He is optimistic that the company can catch up by Q4. “That is one reason why I am travelling again,” says Tan.

Last year, Malaysia accounted for 38% of its total revenue, followed by North America with 32% and Asia (16%).

The breakdown is almost the same for its 2015 revenue contribution by region.

Based on BIMB Securities’ recent report on Kawan Food, analyst Saffa Amanina Mohd Anwar projects its FY18 earnings per share (EPS) at 20.1 sen.

At its five-year high price of RM3.75, the PER works out to almost 19 times. The current price is giving an attractive PER of 15 times.


Factory delay

A possible contributor to the company’s predicament is that its new Pulau Indah factory, originally scheduled for completion by July 2015, has yet to become operational.

“Testing and commissioning are being done now. We are also in the midst of obtaining the certificate of completion and compliance. We will move in slowly from early 2018,” Tan reveals.

He says the refrigeration contractor walked out of the job and left the company with “a big mess”.

“We had to search for a new contractor, which took some time because this is a very specialised field. The new contractor had to almost start from scratch.

“The delay just interrupts the launch of new items but not existing ones,” he says. He nevertheless agrees that the delay will definitely have an opportunity cost.

Tan confirms that once Pulau Indah becomes operational, its production capacity will triple.

On the capacity of the two existing factories, he says it is hard to assess because the company has many different product lines.

The company produces over 10 million kg per annum (in terms of output), says Tan, adding that its outlook is good.

This is supported by BIMB Securities Research which is optimistic on Kawan Food’s long-term prospects due to the potential structural earnings growth from the additional capacity.

The research house says the company plans to expand into the ready-to-eat market by introducing new products from the Pulau Indah facility.

The Shah Alam-based company is one of Malaysia’s larger exporters and manufacturers of frozen Asian food delicacies, including parathas, naan, samosa and puff pastry to name a few.

This article first appeared in Focus Malaysia Issue 260.