• Maintain BUY, with new TP of MYR2.39 from MYR2.46, 12% upside and c.5% FY24F (Mar) yield. 1QFY24 earnings slightly missed our expectations as growth momentum was slower-than-expected. Despite earnings growth no longer being the key value proposition of the stock, we continue to like Power Root as we expect it to sustain the high earnings base supported by quality product offering, entrenched brand equity and efficiency gain. In addition, generous dividend payout is expected to remain thanks to healthy cash flow generation and sturdy balance sheet.

• 1QFY24 results were below expectations. Net profit accounted for 23- 24% of our and consensus forecasts. We gather that the sales growth momentum has shown signs of slowing down. As such, we take the opportunity to trim FY24F-26F earnings by 3-4%. Correspondingly, our DCF-derived TP drops to MYR2.39 (inclusive of an 8% ESG discount) which implies 19x FY24F P/E, at a sizeable discount to the large-cap consumer peers.

• Results review. YoY, 1QFY24 revenue was flat at MYR112m, with the slight uptick in export sales (+2%) more than offset the softness in domestic sales (-1%). That said, we take comfort from the fact that 1QFY23 is an elevated base which represented a 50% YoY jump boosted by economic reopening. On the other hand, relatively stable raw material costs and prudent cost control expanded EBITDA margin by 0.5 ppt to 18.6% and drove 1QFY24 EBITDA higher by 3%. Meanwhile, 1QFY24 revenue was also flattish QoQ similarly supported by robust export sales. That said, net profit fell 13% QOQ on higher marketing spend and higher effective tax rate of 17% from 14% in 4QFY23. DPS of 2.5 sen (based on a higher share base after accounting for warrants conversion) was declared for 1QFY24 (1QFY23: 3 sen).

• Outlook. The subdued growth momentum could persist into 2QFY24F as the company observed soft consumer sentiment which we think was likely dented by inflationary pressures and uninspiring income outlook. As such, we believe PWRT will invest in marketing engagement in order to spur spending, whilst at the same time, continue to enhance its operational efficiency to mitigate the challenges. Meanwhile, we understand that the sharp rise in sugar prices, if it persists, may lead to material cost spikes but prices of other key ingredients have stayed relatively stable. Our FY24F earnings will now imply a pedestrian growth of 4% but we highlight this is on the back of a 45% 2-year earnings CAGR having managed to recover strongly from the pandemic.

• Risks to our recommendation include a sharp rise in input costs and intense competition.

Source: RHB Securities Research - 29 Aug 2023