• Upgrade to BUY from Neutral, with new TP of MYR1.88 from MYR1.33, 21% upside. Power Root’s earnings down-cycle is approaching the tail end as we forecast an 87% net profit growth in FY23F (Mar), underpinned by export recovery, margin normalisation on price increases, robust local sales momentum and continuous efficiency gain. We also like Power Root for the rewarding dividend yield of >5%, established brand equity across operating markets, and efficiency hungry management team.

• Getting out of the woods. After two years of lacklustre earnings, we believe the worst is over for PWRT and foresee a turnaround in FY23F. Management is targeting export sales of up to MYR150m (9MFY22: MYR98m), having observed signs of recovery in key Middle East markets on post-reopening demand normalisation and gradual adaptation to the higher taxes by the consumers. On the other hand, 9MFY22 local sales grew 28% YoY MYR152m and we expect the momentum to sustain going forward, taking into account the effective execution of marketing strategies and contributions from new products whilst we sense that competition in the instant coffee market has eased.

• Price increases and costs discipline to mitigate headwinds. The hikes in commodity prices have translated into higher production costs and crimped margins for PWRT. Having not passed on the costs earlier due to weak market conditions, PWRT has, in stages, adjusted its ASPs for local and export markets since early 2022. The effect should be reflected from FY23F and we forecast GPM to recover to c.44% from 42% in FY21. In addition, PWRT has continued to enhance its operational efficiency by reviewing and modernising its workflow process on both marketing and manufacturing fronts. Meanwhile, more brand building activities should resume following the broad market reopening, but marketing expenses should remain ROI-focused at c.12% of revenue, rising in tandem with its topline.

• All in, we lift our DCF-derived TP to MYR1.88 after tweaking our DCF risk assumptions and raising FY22F-24F earnings by 13-21% to incorporate the abovementioned updates. The new TP (inclusive of a 4% ESG discount) implies 20x FY23F P/E, or close to +1SD from its 5-year mean. We believe the valuation is justified premised on the resumption of earnings growth and generous dividend payout supported by healthy cash flow generation and sturdy balance sheet (net cash of MYR83m or 20 sen/share as at 3QFY22).

• Risks to our recommendation include sharper-than-expected hike in commodity prices and slower-than-expected exports recovery.

Source: RHB Research - 27 Apr 2022