Investment Highlights

• We maintain HOLD call on Power Root (PWROOT) with lower fair value (FV) of RM1.95/share (from RM2.18/share) on revised earnings expectations, pegged to FY25F PE of 17x, standard deviation above the group’s 5-year average of 14x We make no adjustment to our neutral ESG rating of 3 stars.

• We reduce FY24F-FY26F net profit by 12%-17% to account fo lower demand from local and export market impacted by softer consumer sentiments. 9MFY24 earnings of RM33mi missed expectations, reflecting 65% of our earlier FY24F ne profit and consensus forecasts. As a comparison, 9MFY23 accounted for 69% of FY23 core net profit.

• The group declared an interim dividend of 1.3 sen per share which brought 9MFY24 total dividend to 5.

• YoY, the group’s 9MFY24 revenue declined by 12% mainly due to lower demand from both local (-12%) and export (-13% markets, likely due to softer consumer sentiments. Coupled with an unfavourable product mix and higher raw materia inventory cost which caused gross profit margin to slip by 1.7%-point YoY to 52.

• QoQ, 3QFY24 revenue slid by 7% due to lower exports marke (-21.3%), which we believe was likely impacted by softe regional consumer sentiments and upfront purchases prior to the adjustment in average selling price by 5%-10% in 2QFY24 Exacerbated by higher operating cost and unfavourable product mix, 3QFY24 earnings deteriorated by 32% QoQ to RM7mil.

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

• Even so, we expect profit margin to be sustainable above 10%, 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 impac of sugar tax on instant powder products,
  
  (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, and
  
  (iii)Focus on instant premix brands such as frenche roast and oligo as well as strengthening its brand through marketing strategies to capture more market share.

• 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 - 28 Feb 2024