Investment Highlights

• We maintain our BUY call on Power Root with a higher FV of RM2.19/share after increasing earnings forecasts for FY20F, FY21F and FY22F by 5.4%, 8.8% and 5.5% respectively. Our FV is based on unchanged PE 18x FY21F EPS.

• We continue to like Power Root because of: (1) its strong earnings recovery from streamlining of costs and expected 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 4.7–6.4%.

• 1QFY20 net profit of RM12.2mil (+33.2% YoY) was slightly above our and street’s earnings estimates, accounting for 31.4%–30.4% of full-year forecasts respectively. The variance against our forecasts came largely from a lowerthan-expected tax rate and a higher-than-expected EBITDA margin.

• 1QFY20’s top line of RM94.2mil grew 5.6% YoY and 18.4% QoQ. This was on the back of an improved local sales of RM49.1mil (+28.5% YoY, +24.7% QoQ) and export sales of RM45.2mil (-11.5% YoY, +12.2% QoQ).

• We believe that the positive sales growth in 1QFY20 was underpinned by aggressive marketing campaigns as Power Root reallocated around 16–20% of its revenue to marketing initiatives.

• Gross profit increased to RM50.6mil (+9.4% YoY, +23.1% QoQ) as gross margin improved to 53.7% (+1.9ppts YoY, +2.1ppts QoQ) in 1QFY20. We believe this was supported by favourable raw material prices. Power Root continued to enjoy lower raw materials in 1QFY20 as shown in Exhibits 2–5 (arabica –22.0% YoY; robusta -17.3% YoY; sugar –7.7% YoY; cocoa -6.7% YoY).

• EBITDA grew to RM15.1mil (+21.6% Yoy, +40.4% QoQ) as EBITDA margin increased to 16.0% (+2.1ppts, 2.5ppts) in 1QFY20. We believe the enhancement in EBITDA margin in 1QFY20 was driven by Power Root’s continuous efforts to optimize and develop its distribution networks and implementation of cost management measures.

• Moving forward, we anticipate further improvements in subsequent quarters. Operational efficiencies are expected to improve due to the group’s streamlining efforts in its distributorships, favourable raw material prices, and expected better ROI on its A&P spend.

Source: AmInvest Research - 28 Aug 2019