Investment Highlights

• We maintain our HOLD call on Power Root with an unchanged fair value of RM1.21/share using an unchanged PER of 18x on FY22F EPS. We make no ESGrelated price adjustment for our rating of 3 stars.

• Power Root’s 1QFY22 net profit came in at RM2.0mil, within expectations. It made up 7% and 6% of our and consensus forecast respectively. We expect a weak 1HFY22 before a stronger 2HFY22 as lockdown restrictions loosen and the Middle East and North African (MENA) region improves.

• In the near term, we expect earnings to be quashed by heavy pandemic lockdowns in Malaysia, production shutdowns due to Covid-19-related reasons, a delay in the flavouring factory’s construction and elevated freight and raw material costs.

• Within the MENA region, the group is still plagued by inconsistent distribution via parallel exports to Non-Gulf Cooperation Council (GCC) countries as well as competitive pricing by Nescafe as it run downs its inventory. Sugar tax in Saudi Arabia also applies pressure the group’s bottom line.

• The group’s long-term prospects are bright. We are certain that the group’s strong presence locally and in the MENA region will drive sales, while its China and Singapore contributions have promising growth trajectories. In addition, the flavouring factory is expected to improve margins, as the group reduces its reliance on pricey third-party flavourings.

• With Malaysian sales seeing improvements, downward pressure to earnings is expected to come from the MENA region. We do not expect Nescafe to continue to be priced competitively in 4Q2021, although the distribution issue in non-GCC countries is only expected to be resolved in 2022F

• The group reported a revenue of RM75mil in 1QFY22, a gain 15% QoQ but a fall of 11% YoY. QoQ gains were underpinned by stronger export sales as border restrictions loosened. This was slightly offset by weaker local contributions. On a YoY basis, export sales fell while Malaysian sales were stronger.

• The group reported a PBT of RM3.2mil in the quarter. This was a gain of 1.75x QoQ and fall of 76% YoY, attributable to stronger QoQ revenue but weaker YoY revenue.

Source: AmInvest Research - 30 Aug 2021