PWROOT’s 1FY21 earnings came in below expectations on account of weaker-than-expected export sales. While we acknowledge near term weakness, we take the view of a recovery ahead especially in 2HFY22, premised on the efficacy of the vaccines and successful roll-out. TP is raised to RM1.90 and rating upgraded to OUTPERFORM.

Below target. 1FY21 CNP of RM28m missed expectations at 70%/76% of our/street’s respective full-year forecasts. The negative mismatch is due to weaker-than-expected export contribution impacted by the pandemic. It declared a 0.5 sen DPS for the final quarter, making full year DPS of 6.5 sen (below expectation as we had expected DPS of 10.0 sen) implying a payout of 98% (FY20: 94%)

Results’ highlight. YoY, FY21 revenue shrank 20% underpinned by weak exports (-31%). Domestically, it did better than expected constricting 7% (vs. our expectation of -13%). Unfavourable Ringgit and rising operating costs saw PBT margin dropping 5ppt to 11%. A slightly higher tax rate saw CNP falling 45% to RM28m.

QoQ, revenue fell 19% underpinned by sluggish exports (-54%) while domestic rebounded 16%. Rising COGS and Opex saw thinning EBITDA margin (-15ppt to 7%) resulting in core net profit shrinking 74% to RM2m.

Recovery in 2HFY22. While we acknowledge risks in the Group’s near term outlook given the resurgence of the pandemic and further lockdowns, we maintain our view of a gradual recovery (albeit gradually) given the pace of the vaccination roll-out. We also take heart of better vaccine roll-out ahead given the recent latest positive development on the efficacy of the vaccines (i.e. from Pfizer and AstraZeneca); hence, we envisage strong recovery for the Group in 2HFY22. That said; any weakness in profitability should be partially cushioned by: (i) relatively inelastic coffee demand, and (ii) controlled margins from the group’s continuous business transformation plan to achieve greater cost efficiency by driving rationalisation exercises for its distributorships, sales force, and factory operations. The Group will continue collaborating with strategic partners to enhance product awareness, leverage on wider customer base and entice consumers’ sampling at home.

Post results, we tweaked our FY22E earnings by +3% on account of recovery in 2HFY22 and better cost efficiency.

OUTPERFORM. We raised our TP to RM1.90 (from RM1.80) on adjusted FY22E PER of 17.2x (16x previously) in line with its 5-year mean at -0.5SD to account for near-term risks ahead. With solid balance sheet and generous dividend payout (3-year average: 95%) leading to an inspiring dividend yield – c.6%) we upgrade it to OUTPERFORM.

Risks to our call include: (i) lower-than-expected sales, and (ii) lower than-expected dividend

Source: Kenanga Research - 31 May 2021