PWROOT's 9MFY24 results disappointed on declining sales especially in the Middle Eastern market amidst a prolonged conflict in the region. Its 9MFY23 net profit fell 23% on a weaker top line but higher costs. We cut our FY24-25F net profit forecasts by 13% and 9%, respectively, reduce our TP by 20% to RM1.55 (from RM1.95) and downgrade our call to UNDERPERFORM from MARKET PERFORM.

PWROOT’s 9MFY24 net profit disappointed, coming in at only 65% of both our full-year forecast and the full-year consensus estimate. The variance against our forecast came largely from weaker-than-expected sales and margins. It declared a DPS of 1.3 sen, bringing the YTD DPS to 5.8 sen vs. 8.25 sen a year ago.

YoY, PWROOT’s 9MFY24 top line dipped by 12% due to weaker sales in both domestic (-12%) and Middle Eastern markets (-20%), partially offset by a 6% increase in other international markets. Its net profit declined by a steeper 23% mainly due to higher input cost, partially alleviated by a lower effective tax rate.

QoQ, Its 3QFY24 revenue declined by 7% primarily due to a sharp 21% drop in the Middle Eastern market, we believe, as the impact of a prolonged war in the region started to hurt. This was partially cushioned by a 4% pick-up in the domestic market on the back of festive shopping and a shift towards local products amidst the boycott against Western products on the back of the conflict in the Middle East. Its net profit fell by a steeper 32% on higher higher advertising and promotion spending.

Outlook. The ongoing geopolitical instabilities have created challenges in the global retail landscape, impacting demand and supply disruption especially to the Middle Eastern markets. Fluctuations in commodity prices and foreign exchange rates will continue to exert pressure on costs. PWROOT hopes to cushion the impact by stepping up on market penetration, product enhancements, upstream integration and streamlining of operation and distribution.

Forecasts. We cut our FY24-25F net profit forecasts by 13% and 9%, respectively, to reflect the softer export sales and higher operating costs.

Valuations. Correspondingly, we lower our TP by 20% to RM1.55 (from RM1.95) after imputing lower targeted FY25F PER of 13x (vs. 15x previously), at a discount to the average historical forward PER 22x for the food and beverage to reflect PWROOT’s less extensive product range vs.

its peers as well as softened export sales amidst a prolonged conflict in the Middle East. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We are now cautious on PWROOT due to: (i) the declining sales in both the domestic and Middle Eastern markets on macroeconomic headwinds, and (ii) a potential renewed uptrend in food commodity prices due to the heightened geopolitical tensions. Downgraded to UNDERPERFORM from MARKET PERFORM.

Risks to our call include: (i) the Middle East conflict starts to ease: (ii) significant fall in commodities prices, (iii) a stronger MYR resulting i lower cost of imported raw materials, and (iv) a strong recovery i consumer spending as inflation eases.

Source: Kenanga Research - 28 Feb 2024