We are initiating coverage on PWROOT with an OUTPERFORM call and TP of RM2.90 based on a FY18E PE valuation of 17.0x. We see potential in the stock, driven by its growing export segment and expansion plans on the Middle East and North Africa market. In addition, we expect the stock to fetch decent dividend yields of above 4%.

PWROOT closed FY16 with core PATAMI of RM51.6m (+11% YoY, after adjusting for write-offs and impairments of RM8.1m). The better performance was driven by stronger sales (+11% YoY) on recovering domestic sales and growing export demand alongside margin expansions from favorable USD exchange rates. Dividends paid for FY16 amounted to 11.0 sen per share or c.65% of core earnings. Comparatively, 10.0 sen per share was paid out in FY15 at a similar payout ratio.

Exports to take the lead. With the impressive organic sales growth generated by exports, we opine that the group will continue to see an expansion from the segment, spearheaded by the Middle East and North Africa (MENA) market, which accounts for c.78% of export sales. We based this on its higher population base as well as higher standard of living to boost a greater propensity for consumption. In addition, the group’s leading market position in the MENA market may suggest that brand awareness is well rooted with consumers and hence, should experience sustainable demand.

Delay in UAE plant but prospects are still intact. The tentative completion date of the new UAE plant was postponed from Mar 2017 to 2019, following management’s decision to defer the commencement of construction of the plant. Given that construction costs will be incurred in USD, the prevailing strength in USD rates may lead to the loss of its net beneficiary position. While the delay may defer any aggressive growth strategies in the MENA region, we are hopeful that its market share would continue to expand from its resilient demand. Further, we believe the group may be better positioned from securing a wider market share before commissioning the new facility as a larger revenue stream could minimise risks of being overran by large-than-expected overheads. While the Johor plant is running at a utilisation rate of c.85%, we believe the group is able to accommodate future demand growth by ramping up production days.

Strained by commodity prices. Following the normalization of commodity prices (primarily coffee and sugar, the group is likely to face pressures in their profit margins in the short term due to the lack of hedging policies. On the other hand, assuming input costs remain constant, the group will benefit from stronger USD exchange rates

given its sizeable exposure to exports. Exports account for c.40%-45% of total sales, of which c.90% are transacted in USD rates.

Looking forward, we estimate core PATAMI earnings for FY17 to see a slight decline at RM48.9m (-5% YoY) amidst higher production cost pressures. However, we expect a recovery in FY18 to RM52.6m (+7% YoY) arising from higher export sales. Dividend-wise, assuming a payout ratio of c.70%, we could potentially see payments of 11.0 sen/12.0 sen a share which translates to 4.2%/4.5% yield.

Initiating coverage with an OUTPERFORM call and TP of RM2.90.

Our TP is based on the ascribed 17.0x PER on FY18E earnings per share of 17.0 sen, representing +2SD-level above the stocks 2-year average Fwd. PER. We believe a higher valuation premium should be ascribed on this stock given the increase in export exposure. Currently, OLDTOWN trades at an implied FY17E/FY18E PERs of 21.8/19.1x while PWROOT trades at 16.8x/15.6x, respectively. Besides, we believe PWROOT appears to be attractive given its better dividend yield (FY18E: 4.5% vs OLDTOWN’s 2.9%) and ROE ratio (FY18E: 20.0% vs OLDTOWN’s 17.6%)

Source: Kenanga Research - 25 May 2017