We expect a rebound from an unfavourable operating environment resulting in meaningful earnings growth potential. On top of this, the stock provides solid dividend yield of c.5% when compared to the large-cap F&B players’ average dividend yield of c.2%. BUY with TP of RM2.30 underpinned by: (i) rationalised distributor profiles, (ii) improved operational efficiencies, and (iii) new product launches. The TP is based on a PER of 20x in-line with its 3-year mean

PWROOT is poised to see better growth trajectory for both its local and exports market going forward, banking on its (i) streamlined distributors profile, (ii) implementation of new operational system to enhance cost efficiencies, and (iii) introduction of new products to tap on the evolving consumers’ palate. This is expected to be buoyed by more favourable hedged positions for raw materials (mainly coffee) which would keep its processing margins fairly stable.

On the export front, the group still aspire to ramp up their presence in the MENA (Middle East North Africa) region which we believe is spurred by the robust market acceptance in these markets, particularly for their signature product - Ali Café. In addition, we believe the larger overseas market base will continue to provide exciting growth potential for the group.

With volume now solely supported by its manufacturing plant in Johor, we do not discount the possibility for the group expanding its manufacturing processes to the MENA region. Moving forward, PWROOT is poised to start anew with its fresh strategies to drive growth through new product launches and expansion of brand presence overseas as majority of the rationalisation exercises are completed with its streamlined operational processes settling in place.

All-in, this is expected to improve the company’s margins (with our projected net margin of c.11% in FY20 compared to c.5% net margin in FY18). The improved outlook is backed by the company’s rosy growth trajectory, which can only be further strengthened by its solid balance sheet and decent dividend yield of c.5%.

Source: Rakuten Research - 18 Jul 2019