• Upgrade to NEUTRAL from Sell, with new MYR1.60 TP from MYR1.63, 6% downside. Power Root’s 9MFY24 (Mar) results underperformed expectations on weaker-than-expected sales. Whilst we believe sales may have bottomed with the impact of inventory adjustments wearing off, we continue to remain cautious in view of the subdued consumer sentiment in Malaysia and challenges to grow export sales. Recent selldown post our downgrade may have priced in the weakness, hence our rating upgrade.

• 9MFY24 results were below expectations. Power Root’s net profit of MYR33m (-22% YoY) only accounted for 66% of ours and consensus forecasts – mainly dragged by lower-than-expected sales. Post results, we cut FY24-26F earnings by 3-14%. Correspondingly, our DCF-derived TP drops to MYR1.60 (inclusive of a 10% ESG discount), which implies 15x P/E FY25F or below the stock’s 5-year mean.

• Results review. YoY, 9MFY24 revenue dipped 12% to MYR305m with both domestic (-12%) and export (-13%) markets recording declines on the back of inventory adjustments and soft consumption environment. Correspondingly, 9MFY24 operating profit fell 30% YoY to MYR35m, also impacted by unfavourable sales channel mix and higher marketing expenses to facilitate new product launches. QoQ, 3QFY24 revenue was 7% lower at MYR93m, primarily dragged by export market (-21% QoQ) as a result of inventory adjustments and new distributor transition. Together with a higher marketing spend, 3QFY24 PBT slumped 58% to MYR5m.

• Outlook. We believe the export sales may have bottomed out in 3QFY24, hence a rebound is imminent in 4QFY24F with the excess inventory from the earlier build-up depleting. In the local market, management is working to mitigate the impact of unfavourable product and sales channel mix via various strategies. With the weak MYR translating into higher production costs, the company is looking to pass on the higher costs via price adjustments in certain channels or markets, also to effectively narrow the price gaps vs major competitors. On the other hand, we highlight that the recent cancellation of c.24m treasury shares (c.5% of share base) will be positive to EPS.

• Risks to our recommendations include sharp hike/drop in input costs and intensifying/easing competition levels.

Source: RHB Research - 28 Feb 2024