We came away from PWROOT’s first ever analysts’ briefing feeling convincingly positive on the company. This is premised on: (i) continuous earnings recovery going forward, driven by on-going cost improvements and streamlining of distributorships, and (ii) fresh strategies to provide exciting growth prospects by tapping into new markets with more efficiently appointed distributors as well as new SKUs. Reiterate OP with unchanged TP of RM2.30.

1Q20 Results Recap. Recall that the group’s 1Q20 earnings surged 36% YoY, which was largely driven by: (i) stronger domestic sales (+29%) led by new product launches as well as rationalised distributorships, and (ii) improved EBITDA margin (+2.1ppt) due to more prudent A&P spending.

Continuous earnings recovery. PWROOT is expected to see a year of earnings recovery as most of its rationalisation exercises are completed with streamlined operational processes set in place. Nonetheless, the group still aspires to continue driving cost-saving initiatives, which entail more disciplined A&P spending and newly installed operational system to enhance efficiencies. Coupled with its rationalised distributor portfolios, which are more efficient, we believe this bodes well for healthier margins moving forward with our projected net margin of c.11% in FY20 compared to c.5% net margin for FY18. More favourable hedged positions for its raw material (mainly coffee) should also help keep its production costs fairly stable.

It does not stop here. On top of the normalisation of earnings following the rationalisation exercises, we gathered that the group is tapping into the growth opportunities in emerging markets (currently exporting to >40 countries). This will be done by: (i) ramping up their presence in the nonGCC region by partnering with new, financially stronger distributors to allow more aggressive distribution, and (ii) re-entering China market with a stronger online strategy. We deem this to be a good direction for the group given the wider access to higher income consumers which could see a compounding brand awareness of the group internationally. Perhaps this is also timely, as the group’s newly leaner operating methods could minimise/avoid hiccups and mismanagement of costs suffered in past episodes. Apart from that, the group has in their pipeline a new range of SKUs which are targeted at the untapped markets and could act as an avenue for the group to stay relevant to the evolving consumer palate.

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. All-in, we still like the company for its earnings recovery story, solid balance sheet coupled with a decent dividend yield of c.5% (versus 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 - 30 Aug 2019