CHANCES are high that most frozen roti canai (paratha) fans out there are familiar with Kawan Food Bhd. Unfortunately, Kawan Food has not been spared the rod by the ruthless COVID-19 virus.
Yesterday, the company announced that it was temporarily suspending its Malaysian operations from June 14 to 21 on the back of instructions by the Health Ministry (MOH) upon discovery of 78 COVID-19 positive cases (as of June 11) among its estimated workforce of 500.
During this period, Kawan Food will perform deep sanitation of all operating facilities and hostels in Malaysia. Note that the company’s operations in China are unaffected (13.5% of its FY2020 revenue).
Assessing the company’s prospects, CGS-CIMB Research – while being negative on the news – opined that the impact on its FY2021F earnings estimate will be minimal.
“This is given that Kawan Food currently has existing inventories that can cover the production loss from its Malaysia operations for a week,” justified analyst Walter Aw in a company update.
“In addition, Kawan Food can increase its production with extended shifts upon re-commencement of manufacturing activities (the company’s utilisation rate was around 68-70% in 1Q 2021).”
Based on its back-of-the envelope calculations to gauge the impact of a week’s closure of Kawan Food’s Malaysia operations on its FY2021F earnings per share (EPS), CGS-CIMB Research expects revenue and net profit forecasts to be impacted by 3.5% and 2.5% respectively for every week that the company’s Malaysian facilities are not operating.
“This is assuming all things are equal, including no additional shifts upon resumption of operations to offset the production loss during the period,” rationalised the research house.
All-in-all, CGS-CIMB Research makes no changes to its FY2021-2023F EPS estimates of Kawan Food pending further updates on its COVID-19 situation by reiterating its “add” call with a target price of RM3.58.
“We continue to like Kawan for (ii) its strong earnings prospects (three-year EPS compound annual growth rate (CAGR) of 27.3% in FY2020-2023F); ii) robust global demand for frozen food; (iii) strong brand name in the frozen bread market globally; and (iv) strong balance sheet (net cash of RM21.5 mil as of end-1Q 2021),” the research house pointed out.
Its potential re-rating catalysts for Kawan Food include strong export revenue and margin expansion from higher economies of scale. The downside risks include lower export sales and/or a sharp increase in operating expenses.
At 11.56am, Kawan Food was down 1 sen or 0.51% to RM1.96 with 217,700 shares traded, thus valuing the company at RM705 mil. – June 15, 2021
Photo credit (main): BH Online
