Investment Highlights

• We maintain our BUY call on Power Root with a higher FV of RM2.42/share (vs. RM2.19/share previously). Our FV is based on an unchanged PE of 18x FY21F EPS, which is in line with Old Town’s 2-year average forward P/E.

• We have increased our earnings forecasts for FY20F, FY21F and FY22F by 6.7%, 10.3% and 6.6% respectively as we expect better sales growth and margins for the group.

• We continue to like Power Root for: (1) its strong earnings recovery underpinned by streamlining of costs and growth in exports sales; (2) its scarcity premium as Power Root is the closest to a pure play in the segment; and (3) an attractive estimated dividend yield of 4.5–5.9% from FY20F to FY22F.

• The key highlights from our meeting with Power Root are as follows:

1. Recovery in export sales as the group restructures its distributorships.

   a. The group is leveraging its strong brand image in the Middle East & North African (MENA) region to continue to expand its market share;

   b. Its focus on China is to increase penetration in the online space as the online spending in China is huge.

2. The group is expecting further savings from improved production operations processes and plant automation. These are envisaged to drive down production costs and wastages.

3. Power Root is continuously introducing new SKUs in order to expand its reach in the market.

• Power Root is expecting better growth in upcoming quarters after implementing new strategies in its distribution channels.
   
• In the MENA region, which typically makes up around 80% of export sales, the group plans to leverage its wellreceived Alicafé brand. Most of the sales in this region are in respect of the classic coffee variety (like Alicafe French Roast and Alicafe Classic Roast). Recall that the group’s export sales declined in FY19 as expatriates left Saudi Arabia due to the Saudinization scheme which imposed a higher levy on expatriates and their dependents. This had reduced Power Root’s customer base in the region.

• However, we believe that the negative impact had passed and demand for Power Root’s products should stabilize moving forward.

• In China, Power Root’s sales are driven by the Alicafé and Ah Huat brands, where the products are consumed across the country with concentration in the urban centres. To boost growth, Power Root has restructured its online business by setting up a dedicated and experienced online sales team. Around 75% of the group’s sales in China are done online.

• The group is revamping its SOP and inventory management as well as adding new equipment in order to reduce wastages and optimize productivity. As shown in its 1QFY20 results, Power Root was able to lift its margin (EBTIDA margin of 16.0% vs. 13.5% in 4QFY19) by driving down costs. We anticipate EBITDA margin of around 16.8% in FY20F.

• Locally, in order to cater to a larger customer base that consumes “non-functional” beverages, Power Root has launched a new range of Alicafe called Warung (which does not contain Tongkat Ali or ginseng). The group is placing more emphasis on increasing the reach of the brands as part of the KPI for its distributors. Hence, the group has rolled out a handheld sales force reporting system that provides information on real-time distribution network update. This ensures better monitoring of sales performance in various outlets, which in turn allows the group to better strategize its distribution network’s reach and advertising effectiveness.

Source: AmInvest Research - 22 Oct 2019