Investment Highlights

• We maintain our BUY call on Power Root with a lower FV of RM1.65 (from RM2.08) after trimming FY19F, FY20F and FY21F earnings by 20%, 28% and 27% respectively as we reduce sales growth and profit margin assumptions. Our FV is based on 15.0x CY19F P/E, which is in line with its historical average P/E.

• 1HFY19 net profit missed our expectations, accounting for only 40% and 45% of our and street’s full-year forecast respectively. The variance against our forecast came largely from an unexpected decline in its topline of 17.5% YoY, compared with our assumption of flat revenue growth.

• Key highlights of Power Root’s 2QFY19 results include:

1. 1HFY19 topline contracted 17.5% due to the impact of a cutback on local promotional sales and a drop in export sales growth. Local sales saw a 28.2% decline while export sales dropped 17.5% YoY.
2. However, overall PBT improved 40.4%. This is on the back of a lower raw material cost and reduced advertising and promotional spending which resulted in a 4.6-ppt improvement in Power Root’s PBT margin.

• We believe the company’s topline will continue its declining trend in the next quarter. We are estimating a 9.6% fall in topline for FY19F. Subsequently, we believe Power Root’s topline growth will be facing downward pressure from the implementation of the proposed sugar tax in FY20 (April 2019). Recall that canned drinks make up 15% of total revenue in FY18. We now estimate a conservative 4.3% and 4.4% topline growth for FY20F and FY21F respectively.

• Power Root has enjoyed cheaper raw materials in 1HFY19 which boosted its margins (coffee -25%; sugar -27%). However, we have seen a recent uptick in coffee and sugar prices since Aug 2018 of 12.8% and 17.6% respectively. Coupled with the initial margin compression from the excise duty on sugared beverage, we reduce our PBT margin assumption by 1.8ppts for FY20F and FY21F.

• Key risks to our forecast include: (1) a slowdown in export sales; and (2) higher raw materials prices.

• We continue to like Power Root because of: (1) strong earnings recovery from streamlining of costs and growth in its exports sales; (2) scarcity premium for exposure to the instant coffee segment as Power Root is the closest to a pure-play in the segment; (3) steep trading discount to its historical and peer average valuation; and (4) attractive estimated dividend yield of 5.9%-7.3%.

Source: AmInvest Research - 28 Nov 2018