(Source: Google Image)
Human nature desire for convenience has continued to drive demand for Frozen Food. This has further boosted by increasing pace of life and participation rate of women in workforce. According to alliedmarketresearch.com, global Frozen Food market is expected to reach USD 306 billion by 2020, with CAGR of 4.1% from 2015 to 2020. That is a lot of growth projection, compared to the growth rate of US market of around 2.5% recently. (source: tradingeconomics.com).
Kawan Food Berhad (KLSE Code: 7216) is one of Malaysia’s leading exporter and largest manufacturer of frozen Asian food delicacies worldwide. They started as a producer of paratha in Malaysia in 1990s and became a market leader in Malaysia, exporting their products to US, China, SEA, etc.
Throughout the years of growth, Kawan Food expanded their products range into supplying of frozen ethnic food with main product categories such as bakery, bun, chapatti, dessert, finger food, frozen vegetable, paratha and spring roll pastry. In FY2017, Kawan Food begin entering Ready-To-Eat Food market by introducing nasi kapitan ayam and spaghetti goreng mamak.
Kawan Food Berhad is operating in Frozen Food market and now expanding to Ready-to-Eat market, both of which are growing due to fundamental change in human lifestyle. Given recent market rout all around the world, does Kawan Food Berhad look attractive? Or past share price was due to market hype?
Let me share with you 3 key highlights on Kawan Food Berhad, before you decide.
No.1: More than 50% Revenue from Oversea Market
Kawan Food Berhad has presence in US, China, Europe, and SEA, with export contributing to more than 50% of revenue. US market is the largest among the exporting market, consisting of around 30% of revenue. Since the peak in FY2016, US market export sales declined, with management blaming on operation issues with US distributor and unfavourable USD exchange rate.
No. 2: Construction of a State-of-Art Manufacturing Facility
The newly constructed manufacturing facility is situated in Pulau Indah in Klang, Malaysia. The facility consists of a State-of-Art freezing warehouse, which utilizes quick freezing technology and automated warehouse management. This allows more efficient delivery of frozen food products to customers, while retaining highest level of freshness. The planned capacity for Roti Pratha and Chapati (86.6% of total export sales in FY2017) will be 3 times of its older plants’ capacity combined, potentially raising an additional revenue in excess of MYR 300milion (or >1.5x FY2017 revenue)! (source: thestar.com.my)
No.3: Competitive Landscape within Frozen Food Market
Competitiveness within Frozen Food market is reflected in Kawan Food Berhad P&L statement, with bottom line declining since the peak in FY2015. Management has also cited increasing competition and advertising investment done by its peers, prompting Kawan Food Berhad to follow suit.
My Review
Kawan Food Berhad will potentially grow its revenue with the new manufacturing facility, provided there is sufficient demand for its products. The key risks will be further decline in export sales, as well as further intensifying of competition within Frozen Food market.
At a price of MYR 1.91/share, EV/EBIT of 25.05x of FY2017 result, the potential gain from new manufacturing plant is priced in. Despite the recent drop, I will wait for further correction before considering a move.
Disclosure: Not vested.
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