PWROOT’s 1QFY24 results disappointed. Its 1QFY24 sales contracted in the domestic and Middle East markets due to persistent high inflation and slowing economic growth. This trend is likely to continue as macro headwinds linger. We cut our FY24F and FY25F earnings by 8% and 14%, respectively, reduce our TP by 7% to RM2.50 (from RM2.70) but maintain our OUTPERFORM call as the stock still offers value.

Its 1QFY24 core net profit came in at 25% and 24% of our full-year forecast and the full-year consensus estimate, respectively. However, we deemed the results below expectations as we see weaker quarters ahead on slowing sales domestically and from the Middle East due to persistent high inflation and slowing economic growth.

It declared a DPS of 2.5 sen (2.0 sen for the quarter and special DPS of 0.5 sen), on track to meet our forecast of a 12.0 sen DPS (maintained) for the full year.

Results’ highlights. YoY, its 1QFY24 top line stagnated as stronger demand from East Asia (+13%), was offset by weaker sales in the domestic (-1%) and Middle East (-2%) markets. In terms of the revenue split between the domestic market and exports, it remained at 55:45. Similarly, its core net profit was flat as margin erosion (as price hikes did not fully pass on higher cost) and higher depreciation charges were offset by higher other incomes.

QoQ, similarly, its 1QFY24 top line was flat as weaker demand domestically (-3%) due to the timing of festivities and in the Middle East market (-5%) as local distributors stocked up in 4QFY23 ahead of price hikes, were cushioned by a pick-up in sales in East Asia (+30%).

Slowing demand. We understand the slowdown in demand from the domestic and Middle East markets seen in 1QFY24 is likely to continue as macro headwinds persist. Not helping either is the still elevated raw material prices, crimping margins. These will be partially mitigated by product diversification and the expansion of its products lines. One of the key growth areas would be the high-margin ready-to-drink (RTD) products. Its new RTD products plant is expected to be completed by CY24-25. Meanwhile, there are eight SKUs for Malaysia (with three of them expected to hit the market in FY24) and five for the GCC countries in the pipeline.

Forecasts. We cut our FY24-25F net profit by 8% and 14%, respectively, to reflect the softer domestic and export markets.

Having also rolled forward our valuation base year to FY25F (from FY24F), we lower our TP by 7% to RM2.50 (from RM2.70). Our valuation basis is unchanged at 19x forward PER, at a discount to the average historical forward PER of 22x for the food and beverage segment, 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).

We like PWROOT for: (i) its strong brands such as Alicafe and Ah Huat which are household names in the domestic market, especially in the northern belt; (ii) price competitiveness of its products, and (iii) its growing export markets, especially in East Asia. Reiterate OUTPERFORM.

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

Source: Kenanga Research - 29 Aug 2023