Despite price hikes, PWROOT is seeing resilient demand from both the domestic and export markets. The price hikes so far have not dented demand with sales looking stable. It is pushing to grow sales via competitive pricing and focusing on smaller export markets. We raise our FY23-24F earnings forecasts by 6-2%, lift our TP by 6% to RM2.50 (from RM2.35) and upgrade our call to OUTPERFORM from MARKET PERFORM.

We came away from a recent engagement with PWROOT feeling reassured of its prospects ahead. Here are the key takeaways:

1. PWROOT raised its guidance for FY23F earnings to RM55m to RM60m (from RM52m to RM60m). It is equally upbeat on its FY24F prospects backed by: (i) a robust recovery in the Non-Gulf Cooperation Countries (NGCC) markets, (ii) an effective 10% increase in overall selling prices cumulated from a series of recent price hikes as well as an impending one in January 2023, and (iii) the softening cost of inputs, particularly, coffee beans.

2. It is raising prices for specific products in Malaysia again in January 2023, following price hikes in April 2022. It has the headroom given that its competitors have been raising prices. As far as PWROOT is concerned, its price hikes so far have not dented demand as its new prices are still highly competitive in the market. It normally prices its selling prices at least at 10% lower than comparable competing products.

3. It guided for stable sales in November 2022, following a soft October in the aftermath of inventory front-loading by dealers in September. Currently, dealers are only holding one month’s stocks on hopes that prices will ease. PWROOT expects their stock levels to normalise to 1.2-1.5 months by January 2023 which will boost PWROOT’s sales in coming months.

4. Its sales in NGCC have now returned to 75% of pre-Covid levels. One of its major markets, Egypt, has not been recovering due to weakness in their domestic currency. To mitigate this, PWROOT are focusing on other smaller markets. The company expects a major recovery in the NGCC markets in FY24, while other export markets, and mostly in Asia are showing stability with the exception of China due to lockdowns.

5. PWROOT are looking to invest in a new RM35m Ready-To-Drink (RTD) plant, as its current RTD plant is already running around the clock on a 6-day week translating to 95% utilisation.

We raise our FY23F earnings by 6% to reflect: (i) robust demand growth from both the local and export markets (28% from 21% previously for domestic and 31% from 24% previously for the export market), (ii) exports recovering up to 88% of pre-pandemic level for FY23 (from 84% previously). We also hike FY24F earnings by 2% on similar enhanced demand growth expectation. No change to our conservative EBITDA margins at 16% for both FY23 and FY24 on account of still volatile raw materials prices and inflationary pressures.

We upgrade our call to OUTPERFORM from MARKET PERFORM premised on: (i) resilient demand coming from the domestic market, (ii) strong recovery in the export markets, (iii) its ability to pass on rising costs to consumers backed by resilient demand, (iv) competitive pricing, and (iv) it being shielded from volatility in input costs via forward buying.

Correspondingly, we raise our TP by 6% to RM2.50 (from RM2.35) based on 19x FY23F PER. At 19x PER, 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).

Risks to our call include: (i) sustained high inflation hurting consumer spending, (ii) a further weakening in the ringgit resulting in higher costs for imported inputs, and (iii) rising food commodity prices.

Source: Kenanga Research - 29 Nov 2022