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) of FY23F (March). We make no changes to its earnings. The stock is fairly valued at the current level with its share price supported by its attractive dividend yield (4.9% for FY23) and robust balance sheet.

• We recently held a virtual meeting with Power Root management. Here are the key takeaways:

• Growth strategies for FY23. With its sales still below the prepandemic level, Power Root is carrying out several growth strategies to provide an additional boost to its bottom line. The focus of the strategies is widening its distribution network. According to the company’s estimate, there are 5,000–6,000 untapped potential new outlets/distributors in the domestic market which provide ample growth opportunities.
  On top of that, the company is also planning to expand its product offerings in overseas markets such as Brunei. Previously, overseas markets’ offerings were only limited to key volume products. Domestically, Power Root is taking steps to upgrade its operational efficiency such as cutting down lead time by investing in a real-time inventory update system and improving its brand wellness in the marketplace by having a retail audit programme.

• Hedging of raw materials and repricing of products to counter inflation. Power Root has hedged its coffee supply until the end of this year to avoid steep fluctuations of its input cost. Coffee is one of Power Root's key input costs, accounting for 25–26% to its cost of goods sold (COGS). Power Root has increased the price of its product starting 1 January, by 8–9% on average, following the steps of its competitors. The company is targeting a PAT margin of 7–8% for FY23 which implies 0.7–1.7 ppt improvement compared to its recent 3QFY22 reported earnings.

• Details still lacking on the excise duty implementation. Hence there is a possibility that the plan to impose excise duty on sugared premixed drinks will be put on hold and this bodes well for the company. Nevertheless, the company already has its new formula ready should the government decide to proceed with the excise tax plan. However, the reformularization of its products could change the taste of its products and potentially affect demand. Recall that the excise duty was planned to be implemented starting 1 April 2022 during the tabling of Budget 2022.

• Key risks. Further increase in other raw materials prices such as creamer (25% of COGS) and sugar (21% of COGS) may pose a downside risk to earnings. Stronger-than-expected recovery of demand is the key upside risk.

Source: AmInvest Research - 22 Mar 2022