INVESTMENT MERIT

- Egypt - The fallen star. We spoke to PWROOT’s management to get an update recently, and came away with a slightly more cautious view on the company’s near-term prospects. The ongoing political unrest and violent protests in Eqypt have indeed taken a toll on PWROOT’s operations and this had resulted in an abrupt halt in sales orders from this once promising market. This is worth noting as Egypt accounted for a sizable ~27-28% of export sales in FY13 (or ~9% of total sales), and ranked alongside Saudi Arabia and the UAE as the 3 key export markets.

- Challenging outlook. With sales in Egypt coming to a standstill since May, we believe that the impact would be reflected as early as in the upcoming 1Q14 earnings (slated for release next week). The full impact of this void, however, would be more pronounced in 2Q14. Thus far, the volatile situation in Eqypt has shown little signs of abating, and the stand-still could, in fact, persist for some time to come. 

- The silver lining. Nevertheless, sales growth in the surrounding MENA countries remains strong, and PWROOT’s management has guided that the Group is still on-track to achieving its RM130m export sales target regardless. Existing plan to set up a production facility in the UAE is also intact (once export sales reach the RM130m benchmark) and this would enable the company to support the strong growth in the region whilst reducing lead time, import and corporation tax. Furthermore, the Group had recently acquired an office building in Dubai, UAE that would be used as PWROOT’s regional sales office for the Middle East.  

- Take profit for now… While we have made no changes to our FY14E numbers (due to our previously conservative projections), we recognize that the “Egyptian hiccup” could potentially be a dampener on investor sentiment towards the stock once the impact sets in. The valuation also seems stretched at 18.2x FY14E PER. Hence, we feel that perhaps it may be an appropriate time for investors to unload the stock into strength (*note that the technical picture suggests near term upside). That being said, we may revisit the stock should the share price retreats to a more attractive level.    

SWOT ANALYSIS

- Strengths:  Strong foothold in Malaysia. Market leader in the UAE coffee pre-mix market. 

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

- Opportunities: Ongoing plans to set up a production facility in the UAE to cater to the burgeoning demand in the MENA region.  

- Threats: Political unrest in Egypt could dampen export growth.

TECHNICALS

- Resistance: RM2.33 (R1), RM2.76 (R2)

- Support: RM2.08 (S1), RM2.00 (S2)

- Comments: Contrary to our fundamental view on the stock, the technical picture suggests further upside. PWROOT had just broken out of a “Pennant” formation which marks a resumption of the uptrend. RM2.33 is the next resistance to look out  for and should this be taken out next, the share price could potentially extend its gains towards RM2.76 further up.

BUSINESS OVERVIEW

- Power Root develops, manufactures and distributes 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 abroad  into 35 countries from the initial two (Brunei and  UAE) in 2006 as it forges ahead in replicating its success 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