Investment Highlights

• We downgrade Power Root to HOLD from BUY with a lower fair value (FV) of RM2.34/share (vs. RM2.50/share previously). Our FV is based on a PE of 18x FY22F EPS.
• We reduce our earnings forecast by 6% for both FY22F and FY23F to account for a slower-than-anticipated recovery as a result of long-lasting issues with non-GCC markets in the (Middle East and North Africa) MENA region, an uncertain growth trajectory in China and rising sugar and packaging prices. 
• Key highlights from yesterday’s briefing include:

1. Malaysian sales have largely stabilized. New products will be rolled out in CY2021 in contrast to competitors, which are focusing on cost minimization and price-slashing strategies.
2. Gulf Cooperation Council (GCC) countries in the MENA region have seen decent recovery. However, non-GCC countries are facing severe distribution issues.
3. Power Root intends to rectify this by appointing proper licensees and contract manufacturers – a process, which may only be completed in CY2022.
4. China has seen a slight improvement in sales, though far from internal targets. The small improvement in sales can be attributed to the success of an online marketing strategy.
5. Chinese consumers have very little brand loyalty and are easily swayed by flashy gimmicks, a trait which Power Root thinks it can utilize to expand within the market. This adds a degree of uncertainty to its growth trajectory.
6. Going forward, the group intends to develop a factory based in Malaysia to expand its flavouring business. The manufactured flavours would be used for its products and for sale to 3rd parties.
7. A cost-optimization exercise that is currently underway will improve future profit margins. This involves expenditure tracking and process refinement and standardization.
8. Rising sugar and packaging prices are a concern. Other raw materials have been hedged until CY2022 or may be replaced by cheaper alternatives.

Source: AmInvest Research - 4 Dec 2020