Investment Highlights

• We maintain HOLD on Power Root with an unchanged fair value (FV) of RM1.21/share. Our FV is derived from 18x target PER (unchanged) on FY23F (March) (from FY22F) EPS. We revise downwards our earnings estimates, imputing its lower-than-expected 3QFY21 results and more conservative margin assumptions due to rising operating costs.

• Below expectations. 3QFY22 core net profit came in at RM6.0mil (+8% QoQ, -6% YoY), bringing 9MFY22 core net profit to RM13.6mil (-46% YoY). This is below expectations, accounting for 45% and 70% of our and consensus full-year estimates respectively. The pent-up demand post-economic reopening fell short of expectations while margins remained weak and far from the pre-pandemic level.

• QoQ, 3QFY22 revenue rose 18% after both domestic and export markets sales surged 20% and 15% respectively, following the ease of movement restrictions. However, 3QFY22 EBITDA margin dipped 0.8 ppt to 9.9% due to higher marketing expenses and freight cost. Core net profit grew 8% QoQ underpinned by the stronger revenue, offsetting the weakness in margin.

• The increase in commodity prices and other operating costs such as freight cost may continue to put pressure on Power Root’s margin. Recall that coffee, creamer and sugar make up about 85% of its cost of sales. However, the impact to its bottom line could be offset by the recovery in domestic and export sales as well as a potential price hike.

• Earnings revisions. We cut FY22F–24F earnings by 38%– 48% after imputing the delayed recovery and more conservative margin assumptions following the increase in raw materials’ price and other operating costs.

• Dividend. A third interim dividend of 1.5 sen/share was declared, bringing its full-year dividend payout to 2.9 sen/share (92% payout ratio), which is within expectations.

• Future earnings growth could be limited as the impact of sales recovery from the reopening of the economy could be capped by the rising operating costs. However, valuations will be supported by its attractive dividend yield (5.4% for FY23F), supported by its robust balance sheet (net cash of RM82.1mil in 3QFY22) and sustainable demand for its products in the domestic and Middle East markets.
  The re-formularization of its products by lowering sugar content to avoid the soon-to-be-imposed excise duty on sugared premixed drinks which could affect demand, is another key risk.

Source: AmInvest Research - 28 Feb 2022