On 22 Jan 2025, PWROOT announced that it was faced with a RM7.4m lawsuit from EXIM Bank over an insurance claim payout dispute, relating to a payment default several years ago by a former UAE distributor of PWROOT. Asserting that it had acted within contractual and insurance terms, PWROOT had earlier received insurance payment from EXIM Bank, and the latter in turn had been assigned the rights on the outstanding debts. Thus, PWROOT denies the claims being made by EXIM Bank and is confident in its defence. For now, we maintain our forecasts, TP of RM1.30 and MARKET PERFORM call, pending further clarity on legal outcome on 3rd February.

The dispute between PWROOT and EXIM Bank stemmed from a default by PWROOT's former UAE distributor during the economic slowdown in 2017/2018, from our channel checks. PWROOT subsequently filed and received insurance claims from EXIM Bank for unpaid shipments under its export insurance policy, with EXIM Bank thereafter being assigned the outstanding debts.

We understand that after failing to recover the outstanding amount from the UAE distributor through legal proceedings in the UAE, EXIM Bank has initiated a lawsuit against PWROOT, seeking to recover in total RM7.4m which comprised two agreements executed back in 2012.

PWROOT denies the allegations, asserting that the outstanding debts have been assigned to EXIM Bank and any recovery of those debts falls solely with EXIM Bank. The management is confident in defending the lawsuit and has not provided for the contingency.

Forecasts. We understand the company had received the disputed insurance payments after having acted in accordance with contractual and insurance terms. Assuming the courts rule in favour of EXIM Bank, the RM7.4m claims would be equivalent to 20% of annual net profit for FY25F. The fact that company is not making any provisions suggests that this outcome is viewed by the company as not probable. Pending further clarity on the legal outcome, where the matter is scheduled for case management via e-Review on 3 Feb 2025, we maintain our forecasts.

Valuations. We keep our TP of RM1.30 based on 15x FY26F EPS, which is at a discount to the average historical forward PER of 22x for food and beverage industry players, reflecting 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).

Investment case. We like PWROOT for: (i) its leading position as one of the largest coffee manufacturers in Malaysia, and (ii) its strategic marketing initiatives to promote brand awareness for products such as Alicafé, Per'l and Ah Huat. However, its seemingly eroding foothold in its key export market, i.e. the Middle East, coupled with elevated key commodity prices particularly for coffee may pose challenges to its margins. Reiterate MARKET PERFORM.

Risks to our call include: (i) consumer spending being impacted by high inflation, (ii) MYR's weakness resulting in higher costs for imported raw materials, and (iii) significant rise in food commodity prices.

Source: Kenanga Research - 24 Jan 2025