Power Root (PWROOT) registered a core PATAMI of RM23.8m for FY18 (vs. RM34.8m in FY17) due to weaker sales from export and domestic sales and higher amount of expenses incurred from structural exercise, but dividend yield remains attractive at 6.3%. Also, we think the zero-rated GST and stable ringgit trend may support sales from domestic and exports. PWROOT is building a base near the RM1.40-1.50 levels and could poise for a sideways breakout.

Company profile. PWROOT engaged in the production of premixed instant powder beverages in Malaysia and distribution of beverage products. Power Root is a leading company to develop and promote herbal energy drinks fortified with two main rainforest herbs: Eurycoma longifolia Jack or commonly known as "Tongkat Ali" and Labisia Pumilia and Pathoina or "Kacip Fatimah”.

Softer 4Q18 results amid weaker sales and one-offs... PWROOT registered a core PATAMI of RM23.8m for FY18 (vs. RM34.8m in FY17) due to weaker sales from export and domestic sales, coupled with higher amount of expenses incurred from structural exercise (written down of inventories, impairment loss on trade and other receivables, impairment loss on property, plant and equipment).

...but dividend yield remains attractive. Nevertheless, the full-year dividend of 9.5 sen, translating to an attractive dividend yield of 6.3% may cushion out the downside risk for the near term.

Zerorisation of GST and stable ringgit trend may support sales. With the tax holiday starting from 1st of June, PWROOT may see growth in sales as it would reduce shelf prices, contributing to positive sales, eventually. In FY18, the export-to domestic sales ratio stood at 50.8%-to-49.2% and we think the stable ringgit trend would bode well for the business mix.

Building a base; poise for a sideways breakout. PWROOT share price has gapped down towards an intra-day low of RM1.27 before closing at RM1.55 after the recent results. We believe the traders could be looking beyond the softer results and focusing on the decent dividend yield of 6.3%. As the MACD Indicator is hovering above zero and the RSI and Stochastics oscillators are nearing the 50 level, we may anticipate a healthy sideways breakout above RM1.50, targeting RM1.60-1.79, followed by a LT target of RM1.90. Support will be at RM1.38-1.44, with a cut loss below RM1.35.

Source: Hong Leong Investment Bank Research - 5 Jun 2018