Despite three price hikes within slightly over a year, there was hardly any dent on its sales volume. While its main competitor will hike prices again, PWROOT is holding on, to grow market share. We maintain our forecasts, TP of RM2.70 and OUTPERFORM call.

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

1. There was any noticeable dent to PWROOT’s sales volume despite three price hikes within slightly over a year, i.e. in Jan 2022, Oct 2022 and Jan 2203. On the contrary, the price hikes have contributed to a 20% rise in total sales. The only exception is SKU Ali Café which experienced a moderation in sales volume. PWROOT has responded by cutting the price of the 15 x 20g pack by 60 sen or 6%.

2. While its main competitor will undertake another round of price hikes, PWROOT is holding on, to grow its market share. Currently, PWROOT’s products are still about 10% cheaper than its main competitor. There is more room for PWROOT to raise prices in the GCC countries where its products are about 20%-25% cheaper than the market leader.

3. Earnings are looking stable moving ahead. It has locked in its coffee bean prices until Dec 2023, while creamer prices have gone down by at least 18% since Nov 2022. Sugar prices have risen at least 13% since Nov 2022 which PWROOT had effectively responded with price hikes as mentioned above. The impact from the imminent sugar tax will likely to be muted as the sugar content its SKUs are generally below the stipulated threshold.

4. The Middle East market is recovering to pre-Covid levels. GCC countries are back to 90% of pre-Covid sales while non-GCC countries are hitting around 75%. Its largest export destination Saudi Arabia is currently in a pause due to distribution problem since Dec 2022 but will likely resume in May 2023. Impact from the loss of sales is very minimal since exports to Kuwait have doubled to close the gap.

5. PWROOT maintain its key growth drivers for FY24 being product diversification and growing products line. One of the key growth areas would be RTD products with better margins. Its new RTD products plant is expected to be completed by CY24/25. In the pipeline are eight SKUs for Malaysia and five for the GCC countries. However, for Malaysia, it looks like only three will come on-stream in FY24.

Forecasts. Maintained.

We also maintain our TP of RM2.70 based on 19x FY23F PER, 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).

We like PWROOT for: (i) resilient domestic demand despite price hikes, (ii) the strong recovery in the export markets plus its expansion into new markets in Asia, (iii) its ability to pass on rising costs to consumers backed by resilient demand, (iv) its competitive pricing, and (v) it being shielded from input costs volatility via forward buying. Reiterate OUTPERFORM.

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

Source: Kenanga Research - 3 Mar 2023