Investment Highlights

• We maintain BUY on Power Root (PWROOT) with an unchanged fair value (FV) of RM2.67/share, based on FY24F PE of 18x, 0.5 standard deviation below the group’s 3-year average of 21x and on par to the mean for F&B sector. We make no adjustment to our neutral ESG rating of 3-star.

• 1QFY24 earnings of RM15.3mil came within our expectation, reflecting 25% of our and consensus forecasts. Hence, we made no changes to FY24F-FY26F earnings.

• YoY, the group’s flattish 1QFY23 revenue of RM112mil was attributed to slightly higher export market growth of 1.8% that was mostly offset by a 0.9% decline in local. However, 1QFY23 earnings declined slightly by 1% YoY due to higher raw material cost as gross profit margin slipped by 3%-point YoY to 51.1%

• QoQ, 1QFY24 revenue slid by 0.3% due to lower sales from local market (-2.7%) which we believe was likely impacted by the Ramadan season in April. Exacerbated by higher operating cost such as advertising cost during the festive season, 1QFY24 earnings deteriorated by 11% QoQ.

• Moving forward, we expect earnings to be sustainable on the back of:
  (i) enhanced cost control strategies for raw materials such as by sourcing from alternative suppliers and adjusting specific stock keeping units (SKUs) to counter the impact of sugar tax on instant power products, and
  (ii) better operational efficiency such as streamlining sales and marketing processes through digitalisation and upgrading manufacturing processes. This will lead to reduced reliance on labor and improved production output.
  (iii) We continue to like Power Root for (i) its strong export potential from new distributor, Abbar & sons Food for the Saudi Arabian market and joint venture with Sappe, and (ii) well-diversified beverage portfolio which will sustain export growth.

• At a compelling FY24F PE of 14x, Power Root is substantively trading below its historical 3-year mean of 21x and sector average of 18x, while offering a highly attractive dividend yield of close to 6%.

Source: AmInvest Research - 29 Aug 2023