Investment Highlights

• Power Root is poised for a full recovery in FY19 following its kitchen-sinking FY18, which was weighed by elevated input costs. Maintain BUY recommendation and FV of MYR2.20. It is pegged to its historical average P/E. An estimated dividend yield of 6.4%-8.7% is attractive as well. We like it for its high earnings visibility and export-driven growth.

• Power Root registered a 4QFY18 revenue of RM81mil (YoY: -12.4%) as core profit fell into losses of RM3mil (4QFY17: RM9.4mil core profit). It came broadly in line with our but below consensus full-year estimates at 105% and 85% respectively.

• Power Root’s results key highlights included: i. Headline numbers were dragged by one-offs, including written-down inventories, impairment loss on receivables and impairment loss on PPE. It amounted to RM6.6mil. These kitchen-sinking exercises were expected and previously highlighted in our initiation note on 27 April as well. ii. Topline for the quarter contracted 12% YoY. It stemmed from export sales slipping 26% as domestic sales saw flattish growth. We gather growth was impeded by credit issues with a distributor and trade destocking. iii. Going forward, we expect export sales to anchor growth amid muted domestic growth, given the A&P cost rationalization efforts. Trade restocking done in the 1QFY19 should result in robust revenue growth. iv. Gross margins for FY18 were 6.8ppts lower sequentially. However, we expect gross margins to recover for FY19 against locked-in cheaper coffee cost (-14%) while sugar is currently trading almost at a 20% discount. v. New management is looking to rationalize A&P (c: 22% of revenue) to eventually match the FMCG industry average of 10%-15% of revenue over the longer term. By our estimates, for every 1ppt of A&P saved, it impacts the bottom line by up to 10%. We are convinced it is well within management’s reach to scale back and deliver on earnings in FY19.

• Key risks are a slowdown in export sales, higher raw material prices and a potential share overhang. Ex-MD Datuk Low Chee Yen in his capacity owns a 17% stake in Power Root. However, it could improve liquidity as management collectively owns a tightly controlled 66% of outstanding shares.

Source: AmInvest Research - 28 May 2018