Investment Highlights

• We downgrade our call on Power Root to SELL from BUY with a lower fair value of RM1.21/share (vs. RM2.06/share), using an unchanged PER of 18x on FY22F EPS. We make no ESG-related price adjustment for our rating of 3 stars.

• Power Root’s FY21 net profit came in at RM28.1mil, well below expectations. It accounted for 76% of our and consensus full-year forecasts. We lower our FY22F/FY23F forecasts by 18%/10%.

• It has become apparent that the global shipping shortage and ongoing logistical pains in its MENA region will continue to dampen earnings in the next several quarters. The group has previously expressed uncertainty as to when these issues will be resolved.

• Coupled with rising commodity prices, the negative cyclical effects of the Muslim fasting month, an increasingly restrictive local situation with 60% workforce operational rate, we are anticipating the group to be in the red in 1QFY22.

• We forecast a soft recovery in FY23F. Power Root’s intended launch of strategic SKUs in Malaysia in CY21F is likely to be delayed. In the MENA region, the group’s attempts to appoint proper licencees and contract manufacturers in non-GCC countries may be prolonged, largely due to Covid-19 restrictions. The group has previously said that this process could finish as late as year CY22F.

• Without any notable positive rerating catalyst, we expect Power Root’s share price to plummet over the course of next couple of weeks, based on poor investor sentiment for out of-home consumer products in general.

• The group reported a revenue of RM65mil in 4QFY21, a fall of 28% YoY and 19% QoQ. This is caused by a steep fall in overseas revenue, which offset local revenue which experienced QoQ and YoY growth.

• Poor sales led to a fall in quarterly PBT. PBT dropped by 93% YoY and 86% QoQ to RM1.2mil, in spite of lower operating expenses.

• The group declared a fourth interim single-tier dividend of 0.50 sen/share, bringing gross DPS to 7.50 sen/share for FY21, in line with our expectations.

Source: AmInvest Research - 31 May 2021