Investment Highlights

• We maintain our BUY call on Power Root with a reduced fair value (FV) of RM2.50/share (vs. RM2.61/share previously). Our FV is based on a PE of 18x FY22F EPS (rolled over from CY21F).

• 1HFY21’s core net profit of RM18.8mil (-26% YoY) accounted for 35% and 38% of our and street’s full-year earnings forecast. The results were below expectations.

• We reduce earnings forecasts by 15%, 7% and 6% respectively to account for a slower-than-expected recovery in Power Root’s primary markets, a strengthening USD/MYR and volatile coffee prices.

• 2QFY21’s revenue shrank to RM80mil (-20% YoY, -5% QoQ) due to a decrease in export market revenue (-38% YoY, -31% QoQ), as Covid-19 dampened demand. Sugar tax further reduced demand in the MENA region.

• However, this was offset by a stronger showing in the Malaysian segment (+3% YoY, +35% QoQ) as MCO restrictions were relaxed.

• Gross profit margins shrank to 52% (-4ppt YoY and QoQ) in 2QFY21. On a QoQ basis, this was due to raw material costs recovering from record lows: sugar, Robusta, Arabica and milk powder experienced price recoveries (+13%, +17%, +2%, +9% respectively) as global demand began to normalise.

• We expect coffee prices to remain volatile on the back of poor weather conditions in South America and Vietnam while a sugar shortage will push up prices.

• Power Root’s EBITDA fell to RM13mil (-25% YoY, 12% QoQ) in 2QFY21, with a weaker margin of 16.9% (2QFY20: 17.9%, 1QFY21: 18.2%). Better operational efficiency and lower staff cost were not enough to offset the sharp decline in revenue and a strengthening MYR against the USD.

• We continue to like Power Root for its high profit margin through cost streamlining exercises, decent dividend yield of more than 4% and expected growth in its export sales, especially when a full global recovery takes place in FY21F.

• Moving forward, the company intends to increase product coverage in customer touchpoints, optimize production efficiency and customize marketing spending in a more targeted manner.

Source: AmInvest Research - 27 Nov 2020