Tuesday, August 17, 2010

The Good: Kawan Food Berhad

Just had a pretty informative day last Saturday from Tan Teng Boo's Investor Day; though he didn't presented much as mostly are done by his - I guess students. Anyway is quite good. For those who went there and who have heard about the Malaysia's economics outlook and got freak out, I have something that might interest you here. For those who haven't, I wish I could get the data one day to show you where we are and where we are heading. 


For those who plan to sell all their Malaysian shares tomorrow or plan to own some companies with business which have more international exposure, Kawan Food Bhd might interest you. Established in 1977 under the name of Kim Guan Trading Co, it started as a supplier of pastry products kulit popiah and kuih bakul to local groceries and supermarket. The founder Gan Thiam Chai and Gan Thiam Hock don't seem to have much to do with its companies name. Today, it has grow into manufacturing and sale of frozen food products such as spring roll pastries, wanton and dumpling pastries, glutinous rice balls, stuffed pancakes, rolls, buns and loaves, pita breads, frieds, wedges and veggies, sauces, curries and mantou, among others mostly under the name of "Kawan" and "KG Pastry". About 60.5% of its sales are derived from international sales and majority of them come from North America.


Sales Distribution Chart FY2009

Sales Chart

As we can see from the sales chart above, sales across continent except South Africa have seen a double digit annual growth over the past 5 years. And as for FY2009, they have yet to penetrate into China's market in the Asian segment - although I wasn't quite sure how well roti praathas will be accepted in China. 






Products and Brands
Kawan - Mostly West Asian foods such as roti praathas, naan, etc
KG Pastry - Oriental East Asian foods such as man tou, rice dumpling, etc
Veat - The goreng-goreng stuff
Passian Bake - Basically Breads
Kayangan Manisan - Chinese kuih such as Ang Ku, Multi-layered cake etc
I did try one of their man tou the other day. Hey, there are quite good. Really soft and yea, as they claimed, taste is consistent. And also, "just like handmade" if not better than most - really


Fundamentals
Non of Kawan Food direct competitors are listed on Bursa so I can't get much of their information. Anyway they do look quite strong with gross profit margin of 37%-43%. Although there is a question of how much they are able to adjust their prices to inflationary pressure because the rise of wheat flour prices does seem to have eaten their margin a little. 



And if we were to take 2005 sales off, their sales growth from 2006 to 2009 is at the CAGR of 18.6% and net operating profits grow 20.9% annually. The rise of wheat flour prices is felt at the bottom line as well when  operating profit margin is squeezed to 15% and 16%. 





Liquidity wise, Kawan Food should have no problem servicing its short term debts and historically they have been quite prudent. 


They are able to turn their inventories into sales in a month or two. Receivables are collected in less than 3 months. So they are doing okay here. 





Kawan Food 5 years average ROE has been above industrial average at 15.3% and pretty much above most of the food manufacturers in the country. This could be down to the strong demand for their products and effective management. 




Business Operations
Locally, Kawan Food does everything by itself from manufacturing, to packaging, to sales and up until distribution. All that to ensure the quality and freshness of their products as it is pretty sensitive to temperature.  However, their exports are handle by third party local distributors.


With 60% of its sales come from exports, I think this is what we call an international company. Although I'm not quite sure how well our Malaysian foods are accepted by the foreigners and I don't think they have reach Mat Salleh either. Most exports sales are contributed by the Asian communities living in those countries particularly the Indians as foods that are sold under the brand of Kawan bare their origin from India. Currently, Kawan Foods product are only sold in local convenient stores and yet to reach the likes Tesco or Carrefour supermarkets. So there are some room for growth over there given the Indian populations are the second largest in the world and like the Chinese, they are everywhere - mostly in UK, US and Canada.






The group has set its priority to develop its market in China. Foods will be manufactured in Nantong which has become the subsidiaries of Kawan Food (HK) Ltd for tax saving purposes. I'm not sure if they'll sell roti praathas there - perhaps try to carve a niche market. Selling Chinese kind of food might put them into heavy competition. Like, what I've said many time, China's market are huge but so as the competitions. But does that means we shouldn't enter the Chinese's market at all? No no. In fact, we should. It is an ocean full of sharks. But that doesn't mean there are sharks in every part of a sea. They just have to find their way through. Perhaps they could just make friend with those sharks. Kawan mah...


What I like about Kawan Food is their continuous investment into R&D and automation of their manufacturing facilities. These investments have not just improve the quality and consistency of their products but it could be more cost efficient as well. Besides, they are making high value job opportunities which are badly needed by the country. If only there are applicants for such job. 


Some might argue, it is still quite cumbersome to defrost, reheat and makan for a lazy people like me. Personally I still do prefer to go mamak stall to have my roti canai together with my Milo kosong panas (if they ever listen) which they charge more than RM1.50 per cup. Yes Bandaran, they still do that. But...we can't deny not just Malaysian, people are more health conscious nowadays. Sorry la, macha...but continue to make good food still ya. So, there are definitely people who still prefer to less oil or less "reusable" oil in their food. 


Substitute? Instant mee? Hey, those rotis are substitute for instant noodle as well la. Trust me, I've been through that. You are not going to eat instant noodle 4 days straight. You'll get "mual" after some time. And I think of rotis when I feel tired of all these instant noodles. That's me la....


Valuation
For this valuation, I've make an assumption or guesstimate as below for 5 years average:
Revenue: I take the industrial average growth from Reuters at 6%
Cost of Sales is 60% of sales
SGA expenses will be at 25% of revenue
Depreciation roughly about RM3.8million all year
For Capex, I assume about RM7million 5 years average factoring the facilities in Nantong and assuming no new facilities to be build.
Income tax is at 25% 
Discount is at 10%


With 20% margin of safety, Kawan Food is fair valued at RM0.98. So, I guess it is pretty expensive for me now. 

1 comment:

atiqah said...

I want to ask some question..
by analytical procedures how can we know kawan food is a healthy company?
how does it compare with the rest of its industry?(can you give an example of its competitor?) what are its sources of capital and what is the value of their capital? how was the capital market place responded to kawan food company? and what is the quality of earning?