Investment Highlights

• We maintain our BUY call on Power Root with an unchanged FV of RM1.59. Our FV is based on 15.0x FY20F P/E, which is in line with OldTown’s average forward P/E previously.

• FY19 net profit of RM28.0mil met our estimates but missed the street’s full-year estimates accounting for 95.6% and 90.3% respectively.

• Key highlights of Power Root’s FY19 results include: 1. FY19 topline (RM338.0mil, -13.9% YoY) continued to fall on the back of a cutback on promotional sales and drop in both local and export sales. 2. As raw material prices continued to decline YoY in Power Root’s favour as shown in Exhibits 2–4 (sugar: -16.1%; robusta: -15.7%; arabica: -18.3%), gross profit margin improved 4.9ppts to 51.6% (46.8% in FY18). 3. EBITDA rose more than twofold YoY to RM43.5mil (RM17.3mil in FY18) mainly attributed to the company’s streamlining of operating costs and lower raw material prices. Operating costs in FY19 contracted 29% YoY due to lower advertising and promotional spending. As a result, EBITDA margin climbed 8.5ppts to 12.9% in FY19. Power Root also benefitted from a net gain on forex of RM2.3mil in FY19 as opposed to a RM5.0mil net loss on forex in FY18.

• For FY20F, we anticipate sales growth to be hampered by higher ASP as we expect the company to increase shelf prices to pass on the cost of sugar tax. However, we expect EBITDA margin to continue improving on the back of management’s streamlining efforts and lower A&P expenses.

• Key risks to our forecast include: (1) a further slowdown in export sales; and (2) a sudden rise in raw material 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 6.0%–7.1%.

Source: AmInvest Research - 29 May 2019