PWROOT continues to rationalise its sales frontiers, both domestically and regionally to secure margins, albeit possibly at lower revenues. Production costs are expected to remain stable, although current hedging positions should mitigate persisting volatility in commodity prices. Maintain OUTPERFORM and TP of RM1.65 based on 17.0x FY20E PER. We believe our valuation is undemanding, being at a discount from the implied privatisation valuation of OLDTOWN at c.19x. The stock also provides solid dividend yields of 5.1 %/6.2% for FY19/FY20. 

In the near term, the group is implementing operational systems to allow for more effective product delivery, to improve cost efficiency. Additionally, lower promotional spending strategies will progressively improve bottom-line performance. 

Demand for the group's products continues to be strong in the MENA region (Middle East North Africa), owing to the higher spending capability of its population. The group also aims to improve its presence in certain Asian markets, which could be a means to diversify regional exposures. 

Previously affected by unfavourable commodity prices stemming from unfavourable hedging, we continue to expect the group to operate in a more favourable cost environment in the near term. This is on the back of: (i) better hedged positions, and (ii) overall easing commodity trends. 

We remain reassured by the group's medium-term prospects. Prioritising on profitability would ensure that the group continue to be sustainable in the longer term. While the group continue to put its MENA expansion plan on hold, barring any sudden shift in the business environment there, we are comforted that the group's cash pile (i.e.c.RM22.0m as at 1H19) could allow the group to address the need for further injection into expansionary efforts domestically or abroad.

Source: Rakuten Research - 23 Jan 2019