Investment Highlights

• We upgrade Power Root to BUY from HOLD with a lower fair value (FV) of RM2.06/share (vs. RM2.34 previously). Our FV is based on an unchanged PER of 18x on FY22F EPS. We believe that the 33.0% fall in Power Root’s share price from its high of RM2.627 in June 2020 has already reflected the group’s logistics woes in the non-GCC markets. At an FY22F PE of 15.4x, we reckon that Power Root is attractive.

• We reduce our FY21F’s earnings forecast by 19% to take into account a slower-than-anticipated recovery as result of rising sugar prices and interstate travel restrictions within Malaysia. The reintroduction of the MCO within Malaysia will likely affect Power Root’s plan to launch strategic SKUs in CY2021.

• However, we are more optimistic on Power Root’s longterm outlook and thus increase our FY22F and FY23F earnings forecast by 1%.

• A stabilizing USD/MYR ratio, a cost-optimisation exercise and benefits from Power Root’s future flavouring business will nicely complement the recovery of HoReCa demand when mass vaccination are carried out. On a longer term, Power Root believes that it can rectify issues with nonGCC markets by CY2022F.

• 9MFY21’s core net profit of RM25.2 mil (-23% YoY) was below expectations. It accounted for 56% and 61% of ours and street’s full-year earnings forecast. The results were largely due to underwhelming sales in Malaysian markets. We believe that interstate travel restrictions may have dampened numbers as roadside stalls and petrol stations are a crucial distribution channel for Power Root.

• Poorer domestic sales dragged 3QFY21’s revenue down to RM80mil (-21% YoY). EBITDA and PBT fell by 45% and 50% YoY to RM10mil and RM8.2mil respectively. EBITDA and PBT margins were depressed by 5.5 ppts and 6.2 ppts to 10.1% and 12.4% respectively, slightly offset by the group’s cost-optimisation exercise.

• Malaysian revenue experienced a sharp drop in prices throughout the quarter, falling by 10% QoQ and 7% YoY in 3QFY21. We believe that interstate travel restrictions may have contributed to these weaker numbers.

• Foreign revenue showed improvement, most likely as pandemic restrictions in MENA markets were slowly lifted. Revenue rose by 15% QoQ to RM40mil in 3QFY21 as a result. On a YoY basis, the group still remains highly affected by non-GCC market logistic restrictions, and as such, suffered a 31% YoY drop in 9MFY21.

Source: AmInvest Research - 26 Feb 2021