Investment Highlights

• We maintain our BUY call on Power Root with a higher FV of RM2.69/share (previously 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 raise our earnings forecasts by 5–6% for FY21F, FY22F and FY23F. This is to account for a higher sales growth assumption from the Middle East and North Africa (MENA) region. We also expect net margins to improve further as more focus is put into driving internal efficiencies.

• We like Power Root for: (1) its strong earnings recovery from streamlining of costs and expected growth in its exports sales; (2) 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 5.3–6.4% from FY21F to FY23F.

• The key takeaways from Power Root’s briefing yesterday are:

1. The group is planning to build a new plant in Johor Bahru and diversifying upstream.

2. Expecting improved online sales moving forward.

3. Expecting sales growth to come from Egypt with newly appointed distributor.

4. New SKUs to limit the loss in demand caused by sugar tax and higher VAT.

5. Expecting a weak 1QFY21F due to the Covid-19 impact but expecting recovery in subsequent quarters.

6. Export sales mix have grown to 54% in FY20 compared to 51% in FY19.

7. The group expects further savings through cost management and improvement in internal efficiency.

• Power Root is planning to double the capacity for its instant powder products with a new plant in Johor Bahru. The group has earmarked roughly RM35mil for the new plant which is expected to be completed within 2 years.
• Power Root is putting more emphasis to its online platform with plans to align its SKUs and increase social media marketing efforts in order to boost the company’s online presence. A blue-sky scenario could take its online sales to grow tenfold to RM1mil.
• A new distributor in Egypt was hired to tap the growth potential in the market. Power Root believes Egypt will be a new point of growth for the company although the products will garner a slightly lower margin.

Source: AmInvest Research - 10 Jun 2020