Saturday, November 30, 2013

Kawan Food Berhad: One delicious Malaysian stock?


Please read the disclaimer here:http://greedydragoninvestment.blogspot.com/p/about-greedy-dragon.html. Enjoy the article, bitches!


In this article, I will be analysing Kawan Food Berhad. Kawan Food Berhad trades on the Bursa Malaysia with the stock code 7216. The stock closed at RM 1.28 (around USD 0.40) this Friday. I’m a kind of guy that lives to eat and nothing will make me happier than being able to invest in a great food company. Kawan Food manufactures frozen Asian food delicacies such as paratha, samosa, curry puff, oriental buns and etc. For foreign readers who don’t know what a paratha or curry puff is, try to score some of it in your countries as they’re fucking awesome.  Is Kawan Food that great food stock that I’ve been dying to find? Let’s find out.

Kawan Food has trailing twelve months (TTM) return on assets (ROA) and return on equity (ROE) of 10.75% and 12.63% respectively. While not on the level of Nestle, the company’s returns on capital are not bad at all. For the 5-year period of 2008-12, the company’s ROA was between 9.60% and 12.44%. This indicates that Kawan Food has consistently been achieving this level of profitability and that it wasn’t the strong performance for the 9 months ended September 30, 2013 that pushed up ROA.

For the 9 months ended September 30, 2013 Kawan Food grew its revenue and profit before tax by 14.67% and 34.79% respectively which is really good. The problem I have is that the company’s growth rate has slowed down over the 3-year period of 2010-12. Revenue grew at a compounded annual rate of 7.95% which is still alright. However, profit before tax actually declined marginally because of stuff like higher raw material costs. The company’s profits also fluctuate with movements in the USD. Higher USD equals more expensive products for customers not living in the U.S. and therefore lower demand for the company’s products. Macroeconomics 101, bitches! According to the company’s 2011 annual report, 50% of the company’s revenue was billed in USD.

As at September 30, 2013, Kawan Food had a rock solid balance sheet. The company had RM 32.45 million in cash with only RM 22.81 million in total liabilities. So, the risk of debt crushing the company is minimal.  

In my opinion, the main risks to Kawan Food’s profitability are a strengthening of the U.S. Dollar, rising costs of raw materials and increased competition. However, even based on 2012 earnings, the company has a P/E ratio of 11.34 which is really reasonable these days for a business with the quality of Kawan Food. So, I guess the current price of the stock makes accepting the risks worth it.

One of my irrational reservations about the stock is that it had a large run up this year and that I should wait for the price to come down a bit. But it was this mentality that caused me to miss out on a ton of money in the past. Right now I’m just wondering why the fuck I didn’t know about this stock when it was trading below RM 1. Probably watching e-sports… Oh, well…

Kawan Food may not be able to replace my true love that got away (Nestle during the financial crisis), but it will make me feel a little less lonely. I plan to take a small position in Kawan Food next week. If Kawan Food does pull back significantly after I buy it, I would chuck more of the stock into my account the same way I chuck down “roti telur” in a mamak restaurant (assuming that business fundamentals stay intact). Thank you for reading. Take care and stay rational  

Side note for my foreign readers: If you ever visit Malaysia or Singapore, do try to visit a mamak (Indian Muslim) restaurant and sample “roti telur”, “mee goreng” and “nasi lemak ayam.” When it comes to food, once you go mamak you never go back. The food is a bit spicy though, so be careful if you have a weak stomach.   

2 comments:

  1. Hi Justin, great analysis. Indeed a good value play.

    I really like Kawan Food from entrepreneurial perspective. They produce a lot of Malaysian-style food and export it globally (more than 50% of sales). It is really a niche market and I guess that created a strong moat around the business.

    However, locally I think Kawan's brands are not very well known and have to compete with many other brands. I am not a knowledgeable food shopper so my view might not be accurate. My point is--locally, Kawan is not in a niche market.

    Nonetheless, the prudently managed balance sheet--as pointed out in your article--reflects that the management is not nonsense, another point that I like on Kawan.

    To me, Kawan Food is a very Buffett-like investment, provided the price is attractive. As the current price is not too high and not too low, I will pass for now, but I may be wrong.

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    1. Thanks! Glad you liked my analysis. Yeah, I think you're right about it being a niche player. To be honest I never really tried their product (will buy it the next time I'm at a super market). Too bad I don't know any of their competitors so I can't really compare against them to see if its really earning superior profits. And I'm guessing that their pricing power is much higher overseas as its unique, but over here can buy most of their stuff at warung or mamak so not really special.

      Overall I think profitability is decent, could be even better if they had some leverage but I'm happy with it now too as less risky with so little debt. I bought a small position (6,000 shares) today. If it soars, at least I'm already invested. If it drops, then I can buy more.

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