FY19 core PATAMI of RM33.0m was above estimates, while full-year dividend of 8.0 sen is deemed to be within expectation. We anticipate PWROOT to benefit from rationalisation exercises that are bearing fruit, better coffee commodity prices and possible sales growth, especially in export markets. Maintain OUTPERFORM with a higher TP of RM1.75 (from RM1.65).

FY19 closed strong. FY19 Core Net Profit of RM33.0m made up 107%/108% of our/consensus full-year forecast, beating expectations. Recall that in our Results Preview on PWROOT on 15 May 2019, we reckon that core earnings could potentially register between RM29.0mRM33.0m following: (i) the group’s rationalisation of its distributor and client profile, which may result in impairments/provisions; (ii) better commodities (mainly coffee) prices, and (iii) cost savings from various operational streamlining exercises. An interim dividend of 2.9 sen was declared, amounting to FY19 total dividend of 8.0 sen. We deem this to be within our 7.5 sen estimate on an anticipated c.95% payout.

YoY, 12M19 sales of RM338.0m (-14%) was weaker in both domestic and export markets owing to rationalisation exercises on the group’s distribution network. However, core EBITDA expansion of 56% (margin recorded at 14.0%, +6.3ppt) stemmed from: (i) profitability recovered from the abovementioned rationalisation exercises, (ii) better average coffee input costs, and (iii) streamlined operating landscape. This translated to a FY19 core PATAMI of RM33.0m (+42%), adjusting for provisions and impairments, which could have resulted from the rationalisation exercise, alongside forex gains/losses.

QoQ, 4Q19 revenue declined slightly by 3% owing to a lower domestic sales mix. However, CNP of RM12.0m was an improvement of 85%, which we believe could be driven by the better operating landscape above and more favourable margins with the change in distributors.

A smoother blend. Having previously undergone a volatile phase in its operations (mainly bogged by unfavourable raw material prices and operational leakages), it could appear that PWROOT is on the right track to regain some lost market position. A newly rationalised distributor and client profile could enable to group to recalibrate and expand its exposure in trade channels whilst keeping margins in check. Additionally, production costs could ease on the back of better hedged commodity positions and a closer eye on operating methods. On exports, management aspires to ramp up its footprint in the MENA segment, possibly enabled by the group’s presently leaner methods and new distributor relationships. Domestic and export sales account for 50:50 of the group’s portfolio, which we believe could see a wider skew towards exports in the near future.

Post-results, we nudge our FY19E earnings by 3.3%, mainly on the back of a stronger export sales mix. Additionally, we introduce our FY21E numbers.

Maintain OUTPERFORM with a higher TP of RM1.75 (from RM1.65). Our TP is based on an unchanged 17.0x FY20E PER, at -1SD over its 3- year mean on a higher FY20E EPS. We believe our valuation is undemanding, being at a discount to the implied privatisation valuation of OLDTOWN at c.19x 1-year Fwd. PER, while the discount was previously premised on PWROOT’s more volatile outlook. On top of a rebound from an unfavourable operating environment resulting in meaningful earnings growth potential, the stock also provides solid dividend yields of 6.7%/7.8% for FY20/FY21. Typically, large-cap F&B players on average provide dividend yield of c.2.0%.

Risks to our call include: (i) lower-than-expected sales, (ii) higher-thanexpected commodity and marketing costs, and (iii) lower-than-expected dividend payments.

Source: Kenanga Research - 29 May 2019