1Q20 CNP of RM11.7m (+36% YoY) came in broadly within expectations. Declared dividend of 2.0 sen is also within expectations. Post-results, we reiterate our OP call with unchanged TP of RM2.30 as we continue to like the company for its rosy growth trajectory, premised on: (i) rationalised distributorships, (ii) operational enhancements, and (iii) better hedged commodity prices. Decent dividend yield of c.5% and solid balance sheet also act as the cherry on top.

Broadly within. 1Q20 CNP of RM11.7m is deemed broadly within expectations, making up 28%/29% of our/consensus estimates. While we expect stronger results in the coming quarters, the positive stretch for this quarter came mainly from its low tax rates of 8.1%, which we deem to be unsustainable owing to the lapse of tax incentives. The declared dividend of 2.0 sen is deemed to be within expectations, against our full-year estimate of 9.0 sen.

Reaping the fruits. PWROOT started the year on a strong footing by registering a 1Q20 CNP growth of 36% YoY. This was driven by better overall performance as: (i) domestic sales improved (+29%) from its recalibrated distributorships; (ii) better comparative production costs thanks to more favourable hedged coffee prices; (iii) streamlined operating landscape, which could have minimised leakages; and (iv) lower ETR incurred (8.1%, -6.2ppts) during the quarter.

QoQ, 1Q20 CNP declined slightly by 2.2% owing to higher opex which contracted core EBITDA margin by 6.9ppt. We suspect this to be due to higher expenses in tandem with the new distributors.

The coffee is still hot. Moving forward, PWROOT is poised to see better growth trajectories for its local and exports markets, banking on its: (i) better distribution outreach, (ii) implementation of new operational system to enhance cost efficiencies, and (iii) introduction of new products to tap broader range of consumers’ palate. Furthermore, this is expected to be buoyed by more favourable hedged positions for raw materials (mainly coffee) which would keep its production costs fairly stable. All-in, this is expected to expand margins, with our projected net margin of c.11% in FY20 compared to c.5% net margin in FY18. The aforesaid positives are further strengthened by its solid net cash position and dividend yield of c.5%.

Maintain OUTPERFORM with an unchanged TP of RM2.30. Our TP is based on an unchanged 20.0x FY21E PER, which is in-line with its 3- year mean. Investors’ interest could be rejuvenated with the group’s improved outlook, distinguishing from past hiccups with its distributors and rueful commodity hedges. On top of a meaningful rebound in earnings growth potential, the stock also provides solid dividend yields of c.5% when compared to the large-cap F&B players’ average of c.2%. Hence, we believe there is still upside with the aforementioned key positives remaining intact, in spite of the share price surging c.48% YTD.

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 - 28 Aug 2019