Investment Highlights

• We downgrade Power Root (PWROOT) to HOLD (from BUY) with a lower fair value (FV) of RM2.27/share (from RM2.67/share) on revised earnings expectations and a rolled forward FY25F PE of 17x, 1 standard deviation above the group’s 5-year average of 14x. We make no adjustment to our neutral ESG rating of 3-star.

• We reduce FY24F-FY25F net profit by 8-16% to account for lower demand from local and export market impacted by softer consumer sentiments. 1HFY24 earnings of RM26mil missed expectation, reflecting 40% of our earlier FY24F net profit and consensus forecasts. As a comparison, 1HFY23 accounted for 51% of FY23 core net profit.

• The group declared an interim dividend of 2.0 sen per share, which brought 1HFY24 total dividend to 4.5 sen per share (payout: 79%)

• YoY, the group’s 1HFY24 revenue declined by 12% mainly due to lower demand from both local and export markets. We believe this is due to softer consumer sentiments. Coupled with higher raw material inventory cost which caused gross profit margin to slip by 3%-point YoY to 51.1%, 1HFY24 net profit slid by 17% YoY.

• QoQ, 2QFY24 revenue slid by 11% due to lower sales from both local market (-6.4%) and export market (-17.3%), which we believe was likely impacted by the absence of festive season and softer consumer sentiment. Exacerbated by higher depreciation cost and lower other income, 2QFY24 earnings deteriorated by 32% QoQ to RM10mil.

• Moving forward, we are cautious on the group’s revenue growth momentum due to soft consumer sentiment and inflationary pressures continuing to dampen consumer spending.

• Even so, we expect margins 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 powder products, and
  (ii) better operational efficiency such as streamlining sales and marketing processes through digitalisation and upgrading manufacturing processes. This could lead to reduced reliance on labour and improved production output.

• The group currently trades at a fair FY25F PE of 14x, in line with its 5-year mean, while offering a decent dividend yield of 4%.

Source: AmInvest Research - 23 Nov 2023