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Friday, February 17, 2017

Kawan: Uptrend Likely to Continue

Background

Kawan Food Berhad ('Kawan') is involved in the manufacturing & sales of frozen Asian food delicacies. It's the largest frozen flour floor food producer in the country as well as the largest manufacturer of roti paratha in the world. Its roti paratha is exported to many countries, including its largest export market, the US. Until end of last year, Kawan operated from its Shah Alam factory. Its new factory in Pulau Indah has been completed end of 2016, which increases its warehouse capacity by 4-5 times.


From Company's website

Recent Financial Results

Kawan's latest financial result is for QE30/9/2016. Its next quarterly result for QE31/12/2016 will be out in 2 weeks time. For QE30/9/2016, its revenue was mixed, down 15% q-o-q but up 10% y-o-y to RM47 million while net profit was the reverse - up 33% q-o-q but practically unchanged y-o-y at RM12 million. Revenue dropped q-o-q due to decrease turnover from all regions except Oceania. Profits rose due to lower advertisement and promotion expenses and favorable RM/USD exchange rate in the current quarter.


Table: Kawan's 8 quarterly results


Graph 1: Kawan's P&L  for last 14 quarterly results

Historical Financial Performance

In the past 11 years, Kawan's revenue & profits has been on a steady uptrend. Its net profit margin as been kept at around 15% but enjoyed a slight bump to 20% last year (probably due to favorable USD/MYR exchange rate).


Graph 2: Kawan's P&L  for last 11 yearly results

Latest Financial Position

Based on its accounts for QE30/9/2016, Kawan's financial position is deemed satisfactory. Current ratio is at 4.3x and gearing ratio at 0.2x. The high current ratio is due to Cash & Bank Balances of RM92 million which included cash reserved for the construction of its new factory in Pulau Indah. As at 30/9/2016, the contracted commitment for Property, Plant & equipment was RM49 million.

Valuation

Kawan (closed at RM4.09 yesterday) is now trading at a trailing PER of 28x (based on last 4 quarters' EPS of 14.4 sen). The high PER reflects the expectation of a jump in earning in the current year due to the increased capacity from the new factory. The question is whether Kawan can utilize the increased capacity fast enough to meet investors' expectation.

Technical Outlook

Kawan is in a long-term uptrend line, with support at RM3.80. On Feb 15, it broke above the horizontal line at RM4.00, turning a strong resistance to a support.


Chart 1: Kawan's weekly chart as at Feb 16, 2017 (Source: MalaysiaStock.Biz)

We can see below that Kawan's uptrend continues after upside breakout of the resistance from horizontal lines. If the current breakout can sustain, this target for this upleg is RM5.00.


Chart 2: Kawan's monthly chart as at Feb 16, 2017 (Source: MalaysiaStock.Biz)

Conclusion

Based on technical breakout and expected increased earnings from its increased capacity, Kawan could be a good long-term investment. However, we may regard it as a good trading BUY for now as we await the results for the next 2-3 quarters to confirm the uptake for its huge expansion.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

1 comment:

panaceaasia said...

Dear Alex,

You have the Midas touch. Almost every share you recommend buying moves up.

Thank you.