Investment Highlights

• We upgrade Power Root to BUY from HOLD with a higher fair value of RM2.41/share (from RM1.90/share previously) on raised earnings expectations and a rolled forward FY24F PE of 18x – 0.5 standard deviation below its 7-year average. We make no adjustment to our neutral ESG rating of 3 stars.

• 9MFY23 earnings of RM42mil beat our expectation, hitting 93% of our previous forecast but within consensus estimates at 88%. Historically, 9M results accounted for 86% in FY16, 78% in FY17 and 82% in FY19. Hence, we raise our earnings forecast for FY23F by 22%, FY24F by 34% and FY25F by 29% after factoring in higher sales from local and domestic markets.

• 9MFY23 earnings increased by 3x YoY backed by a growth of 38% YoY in the revenue. Separately, the group posted robust sales in both local (+34% YoY) and export (+45% YoY) markets as the recovery of post-pandemic global economy continues to gain momentum.

• QoQ, 3QFY23 earnings dropped by 28% after reporting lower revenue (-17%), mainly due to: 1) 7% decline in domestic sales, in tandem with decreased volumes as restocking activities were completed in 2QFY23 before the latest round of price hikes in January 2023, and 2) export sales fell as more volumes were sold in Qatar in 2QFY23 vs. 3QFY23 to cater to the World Cup event.

• YoY, 3QFY23 revenue climbed 12%, again bolstered by robust performance of local (+7%) and export (+19%) sales. On the bottomline, 3QFY23 earnings surged 87% YoY as 3QFY22 was affected by higher advertising and marketing expenses in both local and export markets, coupled with higher freight costs.

• The group declared a dividend of 2.25 sen per share during the current quarter, bringing its 9MFY23 dividend to 8.25 sen per share. We estimate an FY23F dividend of 12 sen per share, translating to a decent yield of close to 6%.

• Power Root’s near-to-medium term outlook is expected to remain positive as sales volumes continue to improve on local and export fronts. Notably, 9MFY23 domestic sales have reverted to pre-pandemic levels (FY18-FY19). We expect next quarter to improve as the latest price adjustment will be fully reflected in 4QFY23. Looking at 1Q-2QFY23 bottomline where adjustments have taken place, we estimate a similar 30% upside for 4Q.

• At 15x FY23F PE, the stock is trading below its historical 7-year mean of 23x while offering an attractive yield of close to 6%.

Source: AmInvest Research - 23 Feb 2023