Investment Highlights

• We maintain our BUY call on Power Root with a higher FV of RM2.00/share after rolling forward our valuation period to FY21F and increasing FY20F, FY21F and FY22F earnings by 10%, 12% and 8% respectively.

• We continue to like Power Root because of: (1) its strong earnings recovery from streamlining of costs and growth in its exports sales; (2) its scarcity premium for exposure to the instant coffee segment as Power Root is the closest to a pure play in the segment; (3) an attractive estimated dividend yield of 5.1–6.4%.

• We have revised our earnings to account for higher sales estimates from the local and export markets, favourable raw material costs and improved margins from the group’s streamlining efforts. Our FV is based on 18x FY21F P/E, which is in line with Old Town’s 2-year average forward P/E previously.

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

• Power Root is streamlining its distributorship to improve efficiency. The company has identified distributors with better terms to cater to its export markets in order to achieve better yields while slimming down its distributorship in Malaysia by identifying distributors with stronger sales achievement and trimming those with lower efficiencies.

• In its export market, Power Root has contracted a new distributor in the UAE with better terms that is expected to improve the company’s margins. Meanwhile in its China’s operation, the company will now keep its inventory in a third-party warehouse in China to better facilitate its sales which will help the company to achieve better efficiencies.

• Also, we believe the company is optimizing its A&P spending. Power Root is planning to spend circa 16–20% of revenue on marketing in FY20F. We believe that this will help improve sales from a low base of RM338mil in FY19.

• We believe the initial impact of cutting down A&P (11% of revenue in FY19) and change in distributors have contributed to the decline in sales in FY19, dropping 13.9% YoY. However, we can expect a sales growth recovery stemming from a more enhanced sales network, efficient marketing spending and new product offerings.

• Raw material costs are expected to remain favourable. As shown in Exhibits 1–3, coffee price has declined by circa 15% while sugar price increased 1% in 1HCY19 YoY.

Source: AmInvest Research - 6 Aug 2019