• Maintain BUY, new TP of MYR2.38 from MYR2, 27% upside with c.5% FY23F (Mar) yield. Power Root’s 1QFY23 results beat expectations on a robust sales momentum and improved operational efficiency. Its current valuation is attractive – trading below the 5-year mean – considering its record-breaking FY23F earnings, improvement in underlying fundamentals and strategic position to thrive in an inflationary environment. We also like the company for its efficiency-hungry management team, established brand equity across markets, and generous dividends.

• 1QFY23 results are above estimates. Core net profit of MYR15m (1QFY22: MYR2m) amounts to 34% and 40% of our and consensus full- year forecasts, due to stronger-than-expected sales growth and operational efficiency. Post-results, we raise FY23-25F earnings by 20%, 16%, and 14%. Correspondingly, our DCF-derived TP rises to MYR2.38 (inclusive of a 4% ESG discount). The new TP implies 21x fully diluted P/E or c.50% discount to the valuations ascribed to the large-cap F&B peers under our coverage.

• Results review. YoY, 1QFY23 revenue surged 50% to an all-time high of MYR112m, thanks to robust growth from both the domestic (+41%) and export (+68%) markets. This, in turn, was largely driven by its growing share of the canned drinks market, improved distribution and marketing efficiency and contributions from new products. This led to a sharp earnings recovery, with 1QFY23 PBT more than quadrupling to MYR18m, while its margin widened to 16.5%. QoQ, 1QFY23 sales was 16% higher, driven by the abovementioned growth drivers and price adjustments, which in turn propelled a 22% QoQ jump in 1QFY23 net profit.

• Outlook. We expect Power Root’s explosive earnings recovery to be maintained – premised on the fundamentals improvement in its marketing and distribution strength, whilst the new products have also been well- received by the markets. Also, the recovery in export sales is poised to continue, given the more conducive business environment in key Middle East markets and the upcoming FIFA World Cup 2022 in Qatar later this year. The strong USD will also bode well for the group’s earnings, as it is a net exporter. Meanwhile, cost pressures are expected to be mitigated by price adjustments, and this should sustain the elevated margins ahead. The price hikes by a relatively larger quantum by its major competitors have placed Power Root in a strategic position to capture the trend of consumers down-trading under an inflationary environment, while bringing about more room for cost pass-throughs, if necessary.

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

Source: RHB Research - 30 Aug 2022