PWROOT is stepping up its promotional efforts, expanding its product offerings and strengthening its brand visibility amidst a softening demand in the domestic market. In the Middle East, its sales should pick as its distributors restock, and after it overcomes some teething problems with a new distributor. We maintain our forecasts, TP of RM2.50 and an OUTPERFORM rating.

We came away from PWROOT’s analyst briefing feeling reassured that it is very much on the ball amidst various challenges. The key takeaways are as follows:

1. Stepping up promotional efforts. PWROOT is grappling with declining sales among middle and lower-income demographics due to a shift to cheaper alternatives. Although the firm experienced weaker sales in the Middle East and in China-Hong Kong markets, this was somewhat offset by stronger performance in Singapore and Brunei. It plans to step up marketing efforts in these regions.

2. Hiccups and timing issue in Middle East. PWROOT said the weakness in sales in the Middle East is temporary as local distributors are depleting their high inventories (which were stocked ahead of price hikes a few months ago). We understand it recently appointed a new distributor in one of the Middle East countries, resulting in some teething problems (particularly, with regards to the marketing of the products) which should eventually be solved.

3. Expanding product range domestically. Similarly, domestically, it is intensifying its market efforts, focusing on its under-promoted white coffee SKU, Ah Huat Café, and has enlisted popular Malay entertainment figure Sean Lee as the brand ambassador. The company also plans to introduce Jom Teh, a new mamak teh tarik variant, targeting the 3-in-1 premix tea market. Concurrently, its Frenche Roast promotional campaign, running from July to Sep 2023, has already shown early signs of boosting sales for that product line.

4. Anticipated stable margins. The company anticipates maintaining its gross profit margins at approximately 51%, attributable to two key factors namely: (i) stable raw material prices where its coffee bean prices have been secured to March 2024, while the creamer costs (mainly dairy-based) have been fixed to August 2024; (ii) the absence of elevated inventory costs, thanks to inventory reduction in recent months.

5. No significant increase in dividend payout. PWROOT will not significantly raise its dividend payout despite a strong net cash position of RM107m. The company aims to allocate RM20m in capex over the next five years to expand its product line. The completion date for the new Ready-to-Drink (RTD) product plant, initially targeted for CY2024/CY2025, has been deferred to CY2028, requiring a capital outlay of RM90m.

Forecasts. Maintained.

We also maintain our TP of RM2.50 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.

We like PWROOT for: (i) resilient domestic demand despite price hikes, (ii) the strong demand in its export markets plus its expansion into new markets in Asia, Africa and Americas, (iii) its competitive pricing, and (iv) it being shielded from input costs volatility via forward buying and locking prices for an extended period. 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 - 5 Sept 2023