• Maintain BUY, new TP of MYR2.00 from MYR1.88, 31% upside with a c.5% FY23F (Mar) yield. Power Root’s FY22 earnings beat expectations, on better-than-expected export sales and margins. Its positive export sales recovery momentum and cost pass-through should propel earnings growth to 70% YoY in FY23F, whilst the stronger USD should be earnings-accretive for the company. Its current valuation is attractive and has yet to fully reflect the recovery prospects. We also like PWRT for its established brand equity and efficiency-hungry management team.

• FY22 results are above expectations. The company’s net profit of MYR26m (-7% YoY) exceeded our and consensus full financial year forecasts by 16% and 35%. The positive deviation could be attributed to the stronger-than-expected recovery in export sales and margin improvement. Post-results, we raise FY23-24F earnings by 5%, and introduce FY25F net profit (+8%) in this report. Correspondingly, our DCF- derived TP rises to MYR2.00 (inclusive of a 4% ESG discount), which implies 21x fully-diluted FY23F P/E, or at a c.50% discount to its large-cap F&B peers.

• Results review. YoY, FY22 revenue grew 12% to MYR348m on robust local sales (+24%), whilst export sales recovered strongly in 4QFY22 (+145%) to close the year with a slight 1% drop. That said, FY22 PBT dipped 8% YoY to MYR32m, from higher raw material costs and the resumption of more marketing campaigns. 4QFY22 sales inched up by 1% QoQ to MYR97m, thanks to the sustained normalisation in export sales (+22 QoQ). 4QFY22 PBT surged 86% to MYR14m on a 6.7ppt margin expansion which stemmed from: i) Better product ASPs, ii) a swing in marketing spending, and iii) an improved product mix. A DPS of 5.4 sen was declared for FY22 (FY21: 6.5sen).

• A more visible recovery outlook. We take comfort from the encouraging recovery momentum in export sales, which should drive further earnings normalisation ahead. Also, PWRT has – in stages – adjusted its ASPs for local and export markets since early 2022 to pass on the hike in production costs. The effect should be reflected from FY23F onwards, 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 processes in marketing and manufacturing, which should keep opex inflation under control. Meanwhile, more brand-building activities should resume to spur consumer spending following the broad reopening of the market – but marketing expenses should remain ROI- focused, at c.12% of revenue, only rising in tandem with its topline.

• Downside risks to our recommendation include a sharper-than-expected hike in commodity prices and a slower-than-expected export recovery.

Source: RHB Research - 1 Jun 2022