PWROOT’s 1QFY22 fell short of both our and consensus expectations on account of weak exports and higher operating costs. On a positive note, there was broad recovery quarter on quarter for both top-line and margins. However, given the still volatile raw materials’ prices, we revised earnings downwards with TP reduced to RM1.15 and downgrade it to UNDERPERFORM.

Below. 1QFY22 PATAMI of RM2.0m missed expectations at 6% of both our/consensus estimates as its export market was hit hard by the pandemic compounded by higher operating costs and tax rate. DPS of 0.5 sen is deemed below. (1QFY21: 2.5 sen).

Results’ highlights. YoY, 1QFY22 top-line shrank 11% to RM75m, underpinned by weak exports - falling 40% to RM31m vs. domestic surge of 33% to RM44m. As expected, GP margin shrank (3ppt to 53%) on account of rising sugar prices but mitigated by stable coffee and creamer prices (hedged well into June 2022). EBIT margin was crimped by 12ppt to 4% on account of higher operating expenses. Higher ETR (+15ppt) saw PATAMI ending at RM2.0m (-81%).

QoQ, on a positive note, top-line rebounded by 15% to RM75m underpinned by rebound in exports (67% to RM31m) while the domestic market slumped 6% to RM44m. Overall broad recovery was seen as margins improved, notably GP margin by 6ppt to 53% implying good hedging activities.

Outlook. Premised on the ramping up of the vaccination and recovery in the export market, we are positive FY22E top-line will reach our initial estimate of c. RM340m. Margins will still be a challenge given the volatile sugar prices (sugar and packaging making up to 40% of raw materials costs), and higher operating costs due to the pandemic. We are cautiously optimistic for easing of sugar prices by end of CY2021 on cooling demand and better weather but maintained a conservative view of margins to remain at these levels at least for FY22. On another positive note, the easing of investories expected by end of CY21 is expected to normalise sugar selling prices which PWROOT is expected to take advantage by passing rising costs to consumers. Meanwhile MENA market faces its own set of challenges given the sugar tax with PWROOT unlikely to pass it down to consumers to avoid driving down demand – but eroding margins are expected to be offset by alternative products such as more sugar-free products or cheaper-priced alternatives to mainstream products which would probably come on stream in the immediate term.

Post results, we tweaked our FY22E earnings by -21% to RM26m on account of still challenging margins and higher tax rate.

UNDERPERFORM. TP cut to RM1.15 (from RM1.45) on an unchanged FY22E PER of 18.5x in line with its 5-year mean at -0.5SD to account for near-term risks ahead. Downgrade to UNDERPERFORM.

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

Source: Kenanga Research - 30 Aug 2021