• Maintain BUY and TP of MYR2.60, 15% upside and c.5% FY23F (Mar) yield. Power Root’s 1HFY23 results met our, but beat consensus expectations, thanks to the sustained robust sales momentum and higher operational efficiency. Margin outlook is benign in anticipation of more cost pass-through and the strong USD is earnings accretive. We continue to like the stock for the efficiency hungry management team, established brand equity, and generous dividend payout.

• 1HFY23 results within our, but exceeded consensus expectations. Net profit of MYR31m (4x YoY) accounted for 53% and 60% of our and Street estimates. Post-results, we make no changes to our earnings forecasts and DCF-derived TP of MYR2.60 (inclusive of a 4% ESG discount). TP implies 21x FY23F P/E, or c.50% discount to the valuations ascribed to the large- cap F&B peers under our coverage.

• Results review. YoY, 1HFY23 revenue surged 55% to MYR241m driven by robust growth in domestic (+51%) and export (+64%) sales – on broader reopening of economies, price adjustments and higher contribution from new products. Together with prudent cost management and higher operational efficiency, 1HFY23 operating profit more than tripled to MYR38m, with margin expanding by 9.3ppts to 15.8%. QoQ, 2QFY23 sales rose 15% to MYR129m largely underpinned by the strong momentum in domestic sales which hit a record high of MYR78m boosted by pre-price increase front-loading. However, 2QFY23 net profit only inched up by 2.3% to MYR16m as a result of higher marketing spending and ESOS expenses. A second DPS of 3 sen was declared, bringing YTD payout to 6 sen (1HFY22: 1.7 sen)

• Outlook. We believe the encouraging growth momentum will sustain going forward, taking into account the fundamental improvement in its marketing and distribution strength, effects of price increases and rising contribution from new products whilst the strong USD will also bode well for the group’s earnings as a net exporter. We believe the price hikes on a relatively more aggressive manner by its major competitors have placed PWRT in a strategic position to capture the consumer downtrading under an inflationary environment, considering the widening price gaps. In addition, such dynamic renders it more room for cost pass through, if necessary.

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

Source: RHB Research - 23 Nov 2022