Investment Highlights

• We maintain our BUY call on Power Root with an unchanged FV of RM2.55/share. Our FV is based on a PE of 18x CY21F EPS. Our PE multiple is in line with Old Town’s 2-year average forward PE. We introduce our FY23F earnings forecast of RM61.3mil.

• 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 5–6.6% from FY21F to FY23F.

• FY20 core net profit of RM46.6mil (excluding a reversal of impairment loss on trade receivable amounting RM4.8mil) accounted for 102% of our and 97% of street’s full-year earnings forecasts. The results were in line with our and street’s expectations.

• FY20 revenue grew 14% YoY to RM386mil. This was on the back of an 8% increase in local sales and 21% increase in export sales.

• However, 4QFY20 revenue dropped 11% QoQ (domestic -8%; exports -15%). This was mainly attributed to a slowdown of export sales in the UAE market. Recall that we had already expected lower sales in the UAE due to the impact of the 50% excise tax on sugar sweetened beverages imposed in the UAE starting 1 January 2020.

• FY20 gross profit was higher by 19% YoY as gross margin expanded 2ppt to 54%. We believe this was due to cheaper raw material prices and favourable USD/MYR rates as shown in Exhibit 2–3. In FY20, prices fell for robusta coffee by 18% and arabica coffee by 4% while ringgit weakened against the USD by 4%.

• We expect raw material prices to remain favourable for Power Root. The group has locked in coffee prices until June 2021. Since April 2020, coffee prices have remained relatively flat.

• FY20 EBITDA surged 60% YoY to RM69mil on the back of a 5ppt increase in EBITDA margin to 18%. 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 instil capital expenditure discipline.

Source: AmInvest Research - 29 May 2020