Investment Highlights

• We maintain our BUY call on Power Root with an unchanged fair value (FV) of RM2.61/share. Our FV is based on a PE of 18x CY21F EPS.

• 1QFY21 core net profit of RM11.3mil (-5% YoY; -12% QoQ) accounted for 21% of our and street’s full-year earnings forecasts. The results were in line with expectations.

• 1QFY21 revenue shrank to RM84mil (-11% YoY; -7% QoQ). This was on the back of lower local sales of RM33mil (-32% YoY; -19% QoQ). The drop was partially offset by better export sales of RM51mil (12% YoY; +3% QoQ).

• The subdued local sales were already expected, owing to volatile demand during the initial stages of the movement control order (MCO) and conditional MCO (CMCO). We think that sales in subsequent quarters will be stronger following the recovery MCO (RMCO) where restrictions are further relaxed.

• 1QFY21 gross profit fell to RM47mil (-7% YoY; 1% QoQ) as a result of lower revenue. However, gross margin improved to 56% (+2ppt YoY; +3.5ppts QoQ). We believe this is because raw materials were cheaper in the quarter (sugar -11% YoY; -20% QoQ, robusta coffee -15% YoY; -9% QoQ, arabica coffee +4% YoY; -9% QoQ and cocoa -2% YoY; -10% QoQ).

• We think that raw material prices will be mixed in the subsequent quarters. So far in 2QFY21F (July 2020 – present), prices were higher for sugar (+6% YoY; +13% QoQ) and robusta coffee (flat YoY; +14% QoQ). On the other hand, prices were low for arabica coffee (-6% YoY; - 3% QoQ) and cocoa (-1% YoY; -2% QoQ).

• Power Root’s EBITDA improved 1% YoY but slid 17% QoQ with a similar trend in EBITDA margin (+2ppt YoY; - 2ppt QoQ). We think that this is because the group has achieved better operational efficiency compared to the previous year but incurred higher operational costs related to the Covid-19 pandemic.

• The group incurred higher cost of labour during the MCO when there were more overtime and incentives paid. There were also some minor disruptions to its supply chain during the initial stages of the MCO but the issues have since been resolved

• 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

Source: AmInvest Research - 27 Aug 2020