PWROOT expects a pick-up in sales in Jan 2024 on restocking by its distributors but is mindful of the sustained inflation that eats into consumers’ spending power. It is anticipating a 10% decline in its FY24F sales. We maintain our forecasts, TP of RM1.95 and MARKET PERFORM call.

We came away from PWROOT’s post-results briefing feeling mixed of its prospects ahead. The key takeaways are as follows:

1. It expects a pick-up in sales in Jan 2024 on restocking by its distributors but is mindful of the sustained inflation that eats into consumers’ spending power. It is anticipating a 10% decline in its FY24F sales, in-line with an 11% decline reported in its 1HFY24 results announced last week. 
To recap, the decline was in both its local and overseas markets, at 13% and 8%, respectively. The local sales were hit by: (i) weak consumer sentiment due to rising inflationary pressure, (ii) staff shortages, and (iii) the absence of a lift in sales value via price hikes (as was the case in FY23). Meanwhile, its overseas sales were affected by a revamp of its distribution structure in the MENA region and as it took time for its distributors to deplete their stock holding, which they front-loaded in FY23 prior to the price hikes.

2. PWROOT anticipates rising costs for its key raw materials, namely coffee beans due to reduced harvest, while non-dairy creamer prices are projected to stay stable in the upcoming months. Separately, the company expects to alleviate manpower challenges in both the local and oversea markets through recent incentive initiatives, implemented to enhance employee retention.

3. PWROOT sees an opportunity to raise the price of its premium Alicafe brand, noting it currently sells at a significant 20%-25% discount compared to market leader NESTLE in the Middle East. Meanwhile, prices for its more budget-friendly products are expected to remain unchanged, considering the high level of competition in that segment.

4. The group experienced a marginal increase in turnover, approximately 10% on its house brand, due to the recent boycott of certain overseas F&B brands, leading to a spillover in coffee demand. However, its Oligo coco product did not see any benefits, owing to limited product awareness.

5. The co-investment initiative with Thailand’s Sappe Public Company Ltd (Sappe) has gone live with the commissioning of multi-lane packaging machines with finalised SKU sizing (at 17g, aligning with the local market standard). Frenche Roast Indulgence and Frenche Roast Signature Blend premix coffee will be the first two products to hit the market in 4QFY24.

To recap, PWROOT and Sappe signed a 60:40 co-investment in Jun 2023. The collaboration will allow PWROOT to expand its instant coffee business in Thailand while helping SAPPE to increase product sales in Malaysia. The rationale is two-fold. Firstly, the agreement allows PWROOT to tap into the RM2.6b coffee market in Thailand, as well as in Indochina with its Frenché Roast instant coffee products. PWROOT will supply raw and packaging materials while SAPPE will handle the packaging and distribution of the finished products.

For now, the capital outlay is THB20m (RM2.7m) for working capital purposes to be shared in accordance with the equity structure. Beyond a 12-to-18-month horizon, there are plans to set up a RM10m production facility in Thailand. Secondly, the agreement also grants PWROOT the exclusive distributorship of SAPPE’s fruit juice with added nata de coco (coconut gel) Mogu-Mogu drinks in Malaysia.

Forecasts. Maintained.

We maintain our TP of RM1.95 based on an unchanged 15x FY25F 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 macro-economic headwinds and a potential renewed uptrend in food commodity prices. Reiterate 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 - 4 Dec 2023