• Maintain BUY and TP of MYR2.60, 27% upside with c.6% FY24F (Mar) yield. Power Root’s 9MFY23 results missed our estimate but met the Street projection, on higher-than-expected opex. That said, we believe its growth fundamentals remain intact, and anticipate a quick rebound in numbers in 4QFY23. We continue to like the company for its established brand equity, efficiency-hungry management team and generous dividends. Its recent share price weakness has presented a more attractive entry opportunity for investors.

• 9MFY23 results are slightly below our expectations but in line with the consensus forecast. The company’s net profit of MYR42m (which more than tripled YoY) met 72% and 78% of our and the Street full-year estimates. The negative deviation can be attributed to higher-than-expected opex arising from employee share option scheme (ESOS) charges (a total of MYR4m booked in 2QFY23 and 3QFY23). Post results, we trim FY23F earnings by 5% but maintain FY24-25F numbers. Our DCF-derived TP stays at MYR2.60 (inclusive of a 4% ESG discount), which implies 19x P/E FY24F, ie at a discount to the valuations ascribed to the large-cap F&B peers under our coverage. This is justified, due to Power Root’s smaller market capitalisation and profit base.

• Results review. YoY, 9MFY23 revenue surged 38% YoY to MYR348m, thanks to robust growth from both its domestic (+34%) and export (+47%) markets. This, in turn, came on the back of the broad economic reopening and positive sales traction with new products. This, together with effective cost control, propelled 9MFY23 operating profit to almost triple YoY to MYR51m, with the margin expanding by 7.4 ppt to 14.5%. QoQ, 3QFY23 revenue slid 17%, which is an expected normalisation from the high 2QFY23 base that was boosted by a pre-price increase frontloading. Coupled with the swing in FX rates, 3QFY23 net profit fell 28% YoY to MYR11.3m. 9MFY23 DPS totalled 8.25 sen, which was significantly higher than the 2.9 sen declared for 9MFY22.

• Outlook. We expect earnings to rebound in 4QFY23F, in view of an anticipated normalisation in sales and the absence of ESOS charges. That said, 4QFY23F will have fewer working days taking into consideration the Lunar New Year break and short month of February. Further ahead, we expect FY24F earnings growth to be underpinned by steady volume growth on the back of engaging marketing activities and quality product offerings. In addition, a more challenging macroeconomic environment may see consumers tightening their belts, by downtrading to alternatives that offer better value – which should bode well for Power Root.

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

Source: RHB Research - 23 Feb 2023