INVESTMENT MERIT

Dividend Reinvestment Plan (“DRP”) provides a cheaper entry opportunity! Power Root announced a recurrent DRP that will allow shareholders to have the option to reinvest their cash dividends in new ordinary shares at a discount (no more than 10% discount to 5-day VWAP). We are positive on this new development, as we believe that the DRP would not only enable the Group to improve liquidity, but more importantly, it allows the Group to conserve its capital for further growth and expansion.

More positive catalysts. PWRT has alot going for the stock, and these include its I) Improving results II) Strong export growth prospects and III) the successful launch of the Ah Huat label in the domestic market and IV) Plans to set up a new production facility in the UAE.

Results review. The gorup has been able to deliver strong topline and bottom line growth. In its recent earnings release, PWRT recorded a 4Q13 revenue of RM75.9m and a net profit of RM9.0m, bringing the full-year figures to RM279.4m (+29% YoY) and RM34.4m (+111% YoY) respectively. The strong result was underpinned by an increase in both the local and export sales from the FMCG business. The results were broadly inline with our expectations, and accounted for 105% of our FY13 net profit projections.

Fine-tuning earnings projections. Post FY13 result, we have fined tune our FY14 net profit projections from RM36.5m to RM37.4m due to housekeeping reasons.

Raised TP to RM2.00. We raised our PWRT target price to RM2.00 (from RM1.48 previously) after rolling over our valuation base year to FY14 with higher targeted PER of 16.0x (from 12.0x previously). Coupled with a potential dividend yield of 4% (FY14 DPS of 8.0sen), the new target price implies a 13% upside. TRADING BUY.

COMPANY UPDATE

Strengths: Strong foothold in Malaysia, with 18-24% in Coffee and 29-33% in Energy drink market shares. Market leader in the UAE coffee premix market.

Weaknesses: Increasing contribution from exports could cause a seasonality effect on the group’s revenue.

Opportunities: Could set up a production facility in the UAE to support growth and reduce delivery lead time in the Middle East and African regions.

Threats: Low barier of entry requires constant A&P budget (15%-20% of revenue)/ new product launches.

TECHNICALS

Resistance: RM1.84 (R1), RM2.00 (R2)

Support: RM1.59 (S1), RM1.50 (S2)

Comments: After a two-month consolidation phase, Power Root has finally broken out of the RM1.50-RM1.59 congestion zone. A "Three White Soldiers" candlestick pattern has also taken shape on the daily chart, and we believe that Power Root could potentially extend its gains towards RM2.00 next.

BUSINESS OVERVIEW

Power Root develops, manufacture and distribute various beverage products such as coffee, tea and herbal energy drinks fortified with two main rainforest herbs i.e. “Tongkat Ali” and “Kacip Fatimah”. Coffee, Energy drinks, Chocolate and Tea account for 77%, 12%, 5% and 5% of its total sales respectively under the brand names of Ali Café, Per’l Café, Oligo Café, Power Root, Per’l Ali Tea and the Ah Huat White Coffee.

BUSINESS SEGMENT AND MARKET DEVELOPMENTS

Through its subsidiaries, Power Root has successfully penetrated into 35 countries from the initial two (Brunei and UAE) in 2006 as it forges ahead in replicating its success experienced in Malaysia. The revenue contribution from overseas markets have grown to 32% of its total revenue, with new markets being developed such as Philippines, Algeria, Maldives, Somalia and Australia. Plans are also underway to expand into Singapore and Hong Kong. Its top export destinations are the Middle East and Africa, which account for 87% of its total exports by revenue.

Source: Kenanga