PWROOT's FY24 results missed our forecast (due to its inability to pass on higher input cost) but met market expectations. Its FY24 net profit fell 29% on lower sales from the domestic and Middle Eastern markets coupled with high input cost. We cut our FY25F net profit forecast by 14%, reduce our TP by 10% to RM1.40 (from RM1.55) and maintain our UNDERPERFORM call.

PWROOT’s FY24 net profit missed our forecast by 6% but met market expectations. The variance against our forecast came largely from its inability to pass on higher input cost. It declared a DPS of 1.3 sen, bringing the full-year DPS to 7.1 sen, which fell short of our forecast of 7.8 sen.

YoY, its FY24 top line dipped by 9% primarily due to weaker sales in both domestic (-9%) and Middle Eastern markets (-15%), partially cushioned by a 9% increase in other international markets. Its net profit declined by a steeper 29% mainly due to its inability to pass on elevated input cost and higher advertising and promotion spending, partially mitigated by a lower effective tax rate.

QoQ, Its 4QFY24 revenue improved by 23% primarily due to an increase in the contribution from Middle Eastern markets (53%), likely driven by the product price hike and improved sales following a revamp of its distribution structure in the MENA region. The domestic market also saw a 6% increase, mainly driven by festive sales and potential spill-over positive effects from the boycott related to the Middle East conflict on certain international brands. Correspondingly, its net profit improved by 26%.

Outlook. On the domestic front, we remain cautious on the group's near- term outlook due to subdued consumer spending amid sustained elevated inflation and consumer anxiety over impending fuel subsidy rationalisation. On a brighter note, the 13% salary increase for civil servants effective Dec 2024 should at least partially restore consumer spending power. The ongoing geopolitical instabilities have created challenges in the global retail landscape, particularly impacting demand and causing supply disruptions in Middle Eastern markets. Fluctuations in commodity prices and foreign exchange rates will continue to exert pressure on costs.

Forecasts. We cut our FY25F net profit forecast by 14% after lowering our margin assumptions and introduce our FY26F numbers.

Valuations. We only lower our TP by 10% to RM1.40 (from RM1.55) as we raise our FY25F target PER to 15x (from 13x) to reflect partial restoration of consumer spending power via the civil servant pay rise. This is still at a discount to the average historical forward PER of 22x for the food and beverage industry players to reflect PWROOT’s less extensive product range vs. its peers.

Investment case. We remain cautious on PWROOT due to: (i) the intensifying competition in premix coffee market locally, (ii) its seemingly eroding foothold in its key export market, i.e. the Middle East, and (iii) persistently high food commodity prices and its inability to pass them on. Maintained UNDERPERFORM.

Risks to our call include: (i) a significant recovery in sales in th domestic and Middle Eastern markets; (ii) lower food commodities prices and (iii) reduced competition as weak players exit the premix coffe market.

Source: Kenanga Research - 24 May 2024