Investment Highlights

• We maintain our BUY call on Power Root with a higher FV of RM2.56/share (RM2.42/share previously). We increase earnings forecasts for FY20F, FY21F and FY22F by 5.2%, 6.2% and 3.7% respectively. Our FV is based on an unchanged PE of 18x FY21F EPS which is in line with Old Town’s 2-year average forward PE.

• 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; and (3) a decent estimate dividend yield of 4.5–5.9% from FY20F to FY22F.

• 1HFY20 core net profit of RM25.3mil (+52.2% YoY) was slightly above our and street’s earnings forecasts accounting for 58.2% and 58.5% of full-year forecasts respectively. The variance against our forecasts came largely from a low tax rate of 12.7% due to tax incentive from pioneer status and utilization of tax credit, and slightly higher EBITDA margin of 17.9% in 2QFY20. However, we expect the effective tax rate to normalize to around 21% in FY20F as the group’s pioneer status has expired in July 2019.

• 1HFY20’s revenue grew 10.1% YoY to RM194.3mil. This was on the back of a 13.3% increase in local sales and 7.3% YoY rise in export sales. The growth in its export sales was largely driven by the MENA region, specifically in Saudi and Qatar due to more sales touch point and better demand in bigger stores. We believe the increase was also due to higher purchases by the distributors that are stocking up its inventory ahead of the festive season. We expect 2HFY20 growth to be driven by local sales as the group plans to roll-out innovative marketing for various festive celebrations.

• Gross profit climbed 16.3% YoY as gross margin improved 2.9ppt to 54.6%. We believe this was supported by favourable raw material prices. Power Root continued to enjoy lower raw materials in 1HFY20 as shown in Exhibit 1 (Arabica -12.8% and robusta -16.1%, sugar +2.7%).

• EBITDA surged 44.2% YoY on the back of a 4.0ppt increase in EBITDA margin to 17.0%. We believe the enhancement in EBITDA margin was driven by Power Root’s continuous efforts to optimize and develop its distribution networks and implementation of cost management measures like tightening its procurement system and establishing guidelines to instill capital expenditure discipline.

Source: AmInvest Research - 26 Nov 2019