PWROOT’s 1HFY24 results disappointed on contraction in sales both in the domestic and Middle Eastern markets. This downward trend is likely to persist on sustained macroeconomic challenges. We cut our FY24F and FY25F net profit by 14% and 7%, respectively, reduce our TP by 7% to RM1.95 (from RM2.10) but maintain our MARKET PERFORM rating.

PWROOT’s 1HFY24 net profit disappointed, coming in at only 43% and 41% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from weakerthan-expected sales. It declared a DPS of 2.0 sen, bringing the YTD DPS to 4.5 sen (1HFY23: 6.0 sen), on track to meet our full year target of 8.5 sen.

Results’ highlights. YoY, its 1HFY24 top line dipped by 12% primarily driven by weaker sales in both domestic (-15%) and Middle Eastern markets (-14%). This downturn was partially offset by a 13% increase in other international markets. Its core net profit declined by a steeper 17% mainly due to higher input cost, partially alleviated by a lower effective tax rate.

QoQ, similarly, its 2QFY24 top line also declined by 11% as both the domestic (-6%) and overseas markets (-17%) continued to face challenges. Its core net profit fell by a steeper 32% on reduced forex gains.

PWROOT has no immediate plan in to raise its products prices, to stay competitive. Note that, the group has made two price adjustments in FY23 – an average increase of 8% for the Alicafe and Ah Huat product lines in Oct 2022, and approximately 11% for the Frenche Roast and Oligo canned drinks in Jan 2023. These adjustments were instrumental in driving a significant 31% YoY growth in turnover in FY23.

Forecasts. We cut our FY24F and FY25F net profit by 14% and 7%, respectively, to reflect the softer domestic and export sales.

Correspondingly, we lower our TP by 7% to RM1.95 (from RM2.10). Our valuation basis is unchanged at 15x FY25F forward PER, at a discount to the average historical forward PER of 22x for the food and beverage 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) its competitive pricing, (ii) increasing overseas markets contribution plus its expansion into new markets in Asia, Africa and Americas and (iii) it being shielded from input costs volatility via forward buying and locking prices for an extended period. However, it will continue to face soft demand from both the domestic and Middle Eastern markets (as evident in the 1HFY24) on macroeconomic headwinds and a potential renewed uptrend in food commodity prices. Maintain MARKET PERFORM.

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 - 23 Nov 2023