Investment Highlights

• We maintain our HOLD call on Power Root with a higher fair value (FV) of RM1.45/share (from RM1.21/share). Our FV is derived from an unchanged target PE of 18x (pegged to a 5-year mean) on higher FY23F EPS. We make no ESG-related adjustment for our 3-star rating.

• Power Root’s results beat expectations as the group’s 4QFY22 net profit jumped (+1.1x QoQ, +4.1x YoY) to RM13mil, bolstered by stronger-than-expected sales, improvement in gross margin and lower operating expenditure. This brought Power Root’s full-year FY22 net profit to RM26mil (-7% YoY), 40% higher than our estimates and 34% above consensus.

• Post-results, we increase our FY23F earnings by 22% and FY24F by 2% after imputing lower operating expense assumptions and adjusting for higher revenue forecasts.

• The group’s 4QFY22 revenue was sustained at RM97mil (+1% QoQ, 49% YoY), a positive surprise as we previously expect sales to weaken after pent-up demand in the previous quarter cooled off.

• The decline in the domestic sales (-12% QoQ) was offset by strong export revenue (+22% QoQ), especially in the Middle East market. The group’s cumulative FY22 revenue of RM348mil (+13% YoY) was 5% above our estimate.

• Power Root’s strategy of hedging its raw material price and repricing products to counter inflation appeared to be more effective than our initial expectation. The group’s gross margin improved 2.7% points sequentially in 4QFY22 to 55.6%, its highest level since 4QFY17. Declines in operating cost (-12%) due to lower advertising expenses provided an additional boost to the bottom line.

• Separately, the strengthening of the US dollar against the MYR, especially during the quarter, bodes well for the company given that 46% of the group’s sales are derived from overseas markets.

• Despite the robust earnings backed by the strong demand recovery, we believe the share price is fairly valued at the current level. Power Root is currently trading 19x FY23F PE, in line with the KL Consumer Product Index’s 5-year historical average PE.

Source: AmInvest Research - 1 Jun 2022