Investment Highlights

• We maintain our BUY call on Power Root with a higher FV of RM2.82/share (RM2.56 previously). Our FV is based on PE of 20x FY21F EPS. We increase our PE multiple from 18x to 20x (which is a slight premium to Old Town’s 2- year average forward PE) due to its strong growth potential as the group plans to penetrate new markets.

• 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.

• The key takeaways from Power Root’s briefing yesterday are :- 1. The group is looking to establish a new factory in Dubai in order to penetrate the Non-GCC countries. 2. Power Root is introducing a new brand, the Frenche Roast, and the revamped Oligo products. 3. Raw material costs are expected to be favourable as the group has locked in coffee prices for FY20F. 4. The group expect further savings through cost management and improvements in internal efficiencies. 5. Local sales in 2QFY20 was affected by a rationalisation of distribution network.

• The group estimates a capex of circa RM30mil to establish a factory in Dubai in order to penetrate the non-GCC countries. We have not imputed earnings contribution from the expansion as it is still in the preliminary stages. However, we are positive on this development as it presents a stronger growth opportunity for the group.

• Power Root is introducing a new brand, the Frenche Roast and the revamped Oligo products. Its Oligo products was rebranded to gain better traction with a younger target audience.
• The Frenche Roast is targeted on the growing 3-in-1 and Latte market. The new brand is expected to be launched nationwide by 4QFY20. As the mainstream market is more competitive, Power Root expects margins to be slightly lower compared to its other products. However as this is the market with the biggest volume, the group will focus on increasing sales volume to boost its growth.

Source: AmInvest Research - 28 Nov 2019