Investment Highlights

• We maintain our HOLD call on Power Root with a higher fair value (FV) of RM1.90/share (from RM1.45/share). Our FV is derived from an unchanged target FY23F PE of 18x (pegged to a 5-year mean) on higher earnings. We make no ESGrelated adjustment for our 3-star rating.

• Power Root’s results beat expectations as the group’s 1QFY23 net profit jumped (+21% QoQ, +6.6x YoY) to RM15mil, bolstered by stronger-than-expected sales. The net profit accounted for 42% of our previous FY23F earnings and 40% of consensus. Historically, 1Q contributed 28%–33% of full-year earnings during the prepandemic period (FY18-20).

• On that account, we increase our FY23F–FY25F earnings by 20%–30% after imputing more bullish revenue assumptions to reflect the strong sales recovery.

• The group’s 1QFY23 revenue hit a new record high at RM112mil (+16% QoQ, 50% YoY) as strong demand for Power Root’s products was sustained across both domestic and export markets despite several rounds of price hikes. Exceeding our expectations, 1QFY23 revenue made up 31% of our earlier FY23F assumption vs. 24%–26% in FY18–20.

• Powered by strong demand from the Middle Eastern market as well as favourable forex from a stronger USD against the MYR, Power Root’s export sales grew +11% QoQ and 63% YoY. Meanwhile, domestic sales expanded 20% QoQ and 41% YoY to RM62mil.

• Although the group’s gross margin dipped 1.4% points sequentially to 54.2%, we deem this as still within its healthy range compared to 47%–54% in FY18–20. Power Root’s strategy of hedging its raw material costs and repricing products helped to counter the impact of inflation and rising costs of doing business.

• Despite the robust earnings backed by the solid demand recovery as well as benefitting from the strengthening of the USD, we believe the share price is fairly valued at current levels. Power Root is currently trading 17.8x FY23F PE, near its 5-year historical average of 18.5x, while offering a good dividend yield of 6%.

Source: AmInvest Research - 30 Aug 2022