PWROOT’s 9MFY23 results met expectations. YoY, 9MFY23 top line surged 38% underpinned by strong demand across Malaysia, Middle East, South East Asia and China. We are unperturbed by the temporary dip in earnings momentum, seen in 3QFY23 and expect demand to pick up in 4QFY23 ahead of festivities. We keep our forecasts but raise our TP by 8% to RM2.70 (from RM2.50). Maintained at OUTPERFORM.

9MFY23 net profit met expectations, coming in at 77% of our full-year forecast and 78% of the full-year consensus estimate. A DPS of 2.25 sen was declared bringing cumulative interim DPS to 7.75 sen, in line with our expectation of 10.0 sen for the full year.

Results’ highlights. YoY, 9MFY23 top line surged 38% underpinned by strong demand across the board, i.e. Malaysia (+34%), Middle East (+62%) and South East Asia and China (+13%). In terms of contribution, domestic market contributed 59% while the rest was at 30% (below its pandemic days of 49%-51%) and 11%, respectively. Its gross profit margin eased slightly on elevated sugar prices while coffee bean prices had been locked until June 23. EBITDA more than doubled on favourable forex rates and product sales mix especially in the 1HFY23. QoQ, revenue dipped 17% dragged down by both the local and Middle East markets which recorded top line contraction of 19% and 33%, respectively. However, other export markets rebounded by 68%.

Resilient top line ahead. We continue to project solid topline for the coming quarters. The blip in the 3rd quarter was already expected as the World Cup season came to end in Qatar plus the front-loading activities by local dealers in Sep 2022 in anticipation of price hikes. We understand that there has been a pause in price hikes but the company will continue to hike price should the need arises. We see robust demand from the local and Middle East markets over the immediate term on festivities-driven demand. Meanwhile, the rise in input cost is contained, thanks to locked-in input prices well into June 2023 as well easing global coffee bean prices.

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, (iii) it being shielded from volatility in input costs via forward buying, and iv) sales looking to normalize in both the domestic and Middle East markets.

We raise our TP by 8% to RM2.70 (from RM2.50) as we roll over our valuation base year to FY24F and ascribe an unchanged 19x 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. peers. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintain OUTPERFORM.

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

Source: Kenanga Research - 23 Feb 2023