• Stay BUY with new MYR2.46 TP from MYR2.60, 20% upside, c.6% FY23 (Mar) yield. Power Root’s FY23 results beat expectations on stronger- than-expected sales and lower-than-expected opex. We continue to like the stock for its solid growth fundamentals anchored by its quality product offerings and strong brand equity, pricing power to cushion cost inflation, as well as undemanding valuations and generous dividend payouts. Such attributes render Power Root a resilient proposition amidst elevated inflationary pressures and global economic uncertainties.

• FY23 results above expectations. Net profit of MYR59m (+128% YoY) met 105-107% of our and consensus’ forecasts. The positive deviation is attributed to stronger-than-expected sales and lower-than-expected marketing expenses. That said, we keep our FY24-25 forecasts materially unchanged and introduce FY26F earnings (+6% YoY). Our DCF-derived TP drops to MYR2.46 to incorporate a revised ESG score of 2.6, with an 8% ESG discount applied. The TP implies 18x FD P/E FY24F which represents a sizeable discount to large-cap consumer staple peers.

• Results review. YoY, FY23 revenue surged 32% to MYR460m, driven by strong growth in local and export markets, on the back of the economic reopening. As a result, FY23 operating profit more than doubled to MYR71m, with operating margin expanding 6.2ppts to 15.4%, further aided by higher operational efficiency and prudent cost management. QoQ, 4QFY23 revenue grew 6% to MYR113m, with 3QFY23 dragged by pre- price increase frontloading. 4QFY23 operating profit jumped 65% QoQ on lower marketing expenses due to over-provision during the previous quarters. DPS of 11.75 sen was declared for FY23 (FY22: 5.4 sen)

• Outlook. Notwithstanding the rise in commodity prices including coffee and sugar, we do not foresee major GPM downside risk going forward, as coffee prices have been locked-in until end FY24F. Management has also stocked up on sugar, while the lower creamer prices could partially offset the impact. The company also has the flexibility to pass on additional costs if the cost pressures persist, by either cutting down on promotional discounts or through price adjustments. As such, we expect FY24F earnings to grow from the elevated FY23 base, premised on the full impact of the price increase in export markets and steady consumption volumes. Risks to our recommendation: A sharp rise in input costs and intense competition.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. We now assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. See our 2 May research note: Envisioning a Better Future.

Source: RHB Research - 26 May 2023