Investment Highlights

• We maintain our BUY call on Power Root with a lower FV of RM1.59 (from RM1.65) after cutting our FY19F, FY20F and FY21F projected earnings by 12.8%, 6.0% and 4.8% respectively as we reduce the sales growth assumption. Our FV is based on 15.0x FY20F P/E, which is in line with OldTown’s average forward P/E previously.

• 9MFY19 net profit of RM23.0mil missed both our and street’s year estimates accounting for 68.7% and 69.8% of full-year forecasts respectively. The variance against our forecast came largely from an unexpected decline in topline growth for both local and export market.

• Key highlights of Power Root’s 3QFY19 results included: 1. 9MFY19 topline (RM258.4mil, -19.6% YoY) continued to fall on the back of a cutback on local promotional sales and drop in both local and export sales. Local sales declined 21.5% YoY while export sales dropped 26.0% YoY. 2. In spite of the decline in revenue, EBITDA improved 25.4% YoY to RM32.7mil in 9MFY19 as the company streamlined its operating costs and enjoyed lower raw material prices. As a result of its streamlining efforts, EBITDA margin rose 4.5ppts to 12.7% in 9MFY19. Power Root continued to enjoy lower raw material prices in 9MFY19 as shown in Exhibit 2 and Exhibit 3 (coffee -17.0% YoY; sugar -18.6% YoY).

• For FY20F, we anticipate demand to decline due to the higher ASP. We expect the company to increase shelf price to pass on the cost of the sugar tax. However, we expect EBITDA margin to continue to improve on the back of management’s streamlining efforts and lower A&P expenses but slightly offset by an expected rise in raw material prices.

• Key risks to our forecast include: (1) a further slowdown in export sales; and (2) sudden rise in raw material prices.

• We continue to like Power Root because of: (1) strong earnings recovery from streamlining of costs; (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 5.0%–6.7%.

Source: AmInvest Research - 27 Feb 2019