PWROOT’s 1HFY23 results met expectations. Having seen a strong 1HFY23 on the back of the economy reopening, we expect the growth momentum to taper as consumers down-trade amidst inflationary pressure and slowing demand post World Cup 2022. We keep our forecasts, TP of RM2.35 but downgrade our call to MARKET PERFORM from OUTPERFORM as valuations have become rich after the strong run-up in share price recently.

Within expectations. 1HFY23 net profit came in at 60% each of our full-year forecast and the full-year consensus estimates. However, we consider the results within expectation as we expect some down-trading in consumer spending in 2HFY23 on higher inflation and post-World Cup 2022. A DPS of 3.0 sen was declared, bringing cumulative interim DPS to 5.5 sen, in line with our expectation of 10.0 sen for the full year.

Results’ highlights. YoY, 1HFY23 revenue grew 55% underpinned by strong showing from the domestic market (+51%) and Middle East markets (+86%) as the global economy recovers from the pandemic. The robust volume in Middle East markets is largely attributed to returning foreign workers in the service industry, particularly from India and the Philippines to the Gulf markets. PWROOT is also seeing Middle Eastern consumers getting accustomed to the sugar tax. The export market contributed 42% to top-line, still below its pre-pandemic days of 49%-51%. Gross profit margin remained solid at 51% on better ASP and locked in inputs prices. Earnings before interest, tax & depreciation saw 4ppts uptick to 12% (vs. our estimation of 16%) on account of gain in forex and favorable product sales mix. A lower effective tax rate at 19% saw core net profit ending >100% to RM31m. QoQ, its revenue grew 15% on account of declining export markets ex-Middle East at 26%. EBITDA declined by 9% on higher operating expenses.

Resilient top line ahead. We expect solid topline coming from the domestic market boosted by further price increases ahead. Despite several price hikes, we note that its coffee prices are still lower than that of its competitors thanks to its diversified sourcing, notably Vietnam and India (apart from the usual Brazil and Colombia) which mitigates the effect of high prices globally. Costs are also well contained; thanks locked in inputs prices that extend well into March 2023.

Forecasts. Maintained.

We like PWROOT on account of: (i) the robust domestic and Middle East markets, (ii) its ability to pass on rising costs to consumers backed by resilient demand, and (iii) it being shielded from volatility in input costs via forward buying. However, we see slowing demand post World Cup 2022 and inflationary pressure.

We keep our TP of RM2.35 based on unchanged 19x FY23F PER. At 19x, we value PWROOT at a discount to the average historical forward PER of 22x for the food and beverage sector, to reflect PWROOT’s less extensive product range vs. its peers. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Downgrade our call to MARKET PERFORM from OUTPERFORM as valuations have become rich after the strong run-up in share price recently.

Risks to our call include: (i) consumer spending hurt by high inflation, (ii) the ringgit’s weakness resulting in higher costs for imported inputs, and (iii) high food commodity prices.

Source: Kenanga Research - 23 Nov 2022