Investment Highlights

• We maintain HOLD on Power Root (PWROOT) with a lower fair value (FV) of RM2.18/share (from RM2.27/share previously), based on a rolled-forward CY24F PE of 18x, 0.5 standard deviation below the group’s 3-year average of 21x and on par to the mean for food & beverage sector. We make no adjustment to our neutral ESG rating of 3-star.

• We tweak FY24F earnings by 6% to account for a weaker sales demand assumption, while maintaining FY25F-FY26F earnings following an analyst briefing yesterday.

• Management expects a weaker quarter ahead and recovery from export market in 4QFY24. While management expect FY24F sales volume to decline by 10% YoY due to soft consumer sentiments, we expect margins to be largely unchanged on the back of lower raw material costs and better product mix.

• To recap, 2QFY24 domestic sales declined by 23% YoY weaker consumer sentiments and higher administrative cost while export sales decreased by 18% YoY as the Saudi Arabian operation was still transitioning to a new distributor which led to low promotional sales.

• Management alluded to a softer 3QFY24 sales revenue due to: (i) weaker local consumer sentiments, (ii) shift towards consumer downtrading trends, and (iii) lower sales from GCC (Gulf Cooperation Council) countries and Saudi Arabia as customers have purchased upfront prior to the adjustment in average selling prices by 5%-10% in 2QFY24. However, management guided for some recovery in 4QFY24 export sales on replenishment activities.

• PWROOT’s raw material prices largely came off from the peak except for sugar and premium coffee bean, which are still rising. However, management is confident of managing volatile costs and expects the margin to be sustainable, as gross profit margin improved 0.6%-points QoQ to 51.7% in 2QFY24.

• The company will continue to focus on instant premix brands such as frenche roast and oligo as well as strengthen its branding through marketing strategies to capture more market share.

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

Source: AmInvest Research - 4 Dec 2023