• We remain assured of PWRT’s medium-to-long-term sales and net profit prospects post its 2QFY3/24 results briefing; reiterate Add.

• We expect sales and net profit to pick up from 4QFY24F driven by i) export sales growth, ii) new product launches, and iii) brand-building exercises.

• We switch to GGM model (prev. 20x CY24F P/E) to better reflect its future profitability, with 21.4% FY26F ROE, 8.7% COE and 4% long-term growth.

Sales and Earnings Growth to Reaccelerate From 4QFY24F

Post its 2QFY3/24 results briefing, we stay constructive on Power Root Bhd’s (PWRT) growth prospects as we expect its sales and net profit growth to reaccelerate from 4QFY24F. This is premised on a few key drivers: i) export sales to the Middle East to regain momentum from restocking activities, and higher sales contributions from Saudi Arabia as its new distributor ramps up sales initiatives, ii) progressive price hikes across its Middle East markets (31.7% of 1HFY24 sales) until year 2025F, iii) margin expansion on lower input costs as it has locked in its raw material requirements (i.e. coffee and creamer) at favourable prices until Sep 2024F, iv) higher economies of scale on higher utilisation rate (vs. 50-55% in 1HFY24). We also expect to see a recovery in PWRT’s domestic sales, supported by the government’s expansionary policy with direct cash-handouts and potential civil servants’ upward salary revisions in 2024F.

Brand-building Exercises and New Product Launches to Drive Growth

Management said that its premium Frenche Roast product domestic sales grew 26% yoy in 1HFY3/24, accounting for c.9% of sales (vs. 5% in FY23), along with its Ah Huat product sales also grew yoy, driven by its ongoing promotional and marketing campaigns. We believe this underscores the effectiveness of its ongoing brand-building initiatives (i.e. targeted influencer and contest marketing campaigns), which could further help drive its sales momentum from 4QFY24F onwards. Management also shared that it observed solid demand for its new Jom Teh brand (its new product launched in Sep-23 to penetrate the 30 sachets 3-in-1 premix tea segment) and is on track to achieve its target of RM3m-5m sales in FY24F. We believe this is a sign of its R&D strength. In addition, management also said it would be enhancing its product packaging designs for its energy drink and Oligo brands in 2HFY24F/FY25F, making its products more competitive.

Reiterate Add With a GGM-based TP of RM2.20 (17.5x CY25F P/E)

We keep our Add call on PWRT with a new TP of RM2.20 (from RM2.80). The revision reflects 1) 10-22% cut in FY24-26F EPS, and 2) switch to GGM valuation (21.4% FY26F ROE, 8.7% COE and 4% long-term growth) to better capture PWRT’s medium-to-long term FY24-26F profitability and growth trajectory. We like PWRT for i) its strong brand equity in the instant coffee segment, ii) undemanding valuations at 14.4x CY25F P/E (24% discount to 10-year average of 19x), and iii) appealing yields of 5-6% (FY24-26F). Strong net cash of RM116m as at 30 Sep 2023. Reacceleration in sales and margin expansion are re-rating catalysts. Downside risks: slowdown in sales, and elevated input cost hurting margins.

Source: CGS-CIMB Research - 13 Dec 2023