• Maintain NEUTRAL, with new TP of MYR1.51 from MYR1.68, 1% downside. Power Root’s 1QFY25 (Mar) results missed expectations on lower-than-expected sales. We maintain our cautious stance on the stock as we believe the recovery of export markets will be patchy given the prevailing challenges whilst the domestic market will continue to be constrained by subdued consumer sentiment. Current valuation could have priced in the challenges, whilst the consistent dividend payout and share buyback should support the share price.

• 1QFY25 results were below expectations. Net profit of MYR7.3m (-52% YoY) accounted for 14% and 13% of our and consensus forecasts. The negative deviation could be attributed to the lower-than-expected sales on the prolonged transition period with new distributors in key export markets. Post results, we cut FY25F-27F earnings by 9%, 6% and 6%. Correspondingly, our DCF-derived TP drops to MYR1.51 (inclusive of a 10% ESG discount), implying a 15x FY25F P/E, or in line with the stock’s 5-year mean.

• Results review. YoY, 1QFY25 revenue fell 6% to MYR106m, mainly dragged by a 13% fall in export sales as key market, Saudi Arabia, was going through a transition period following the change in local distributor. Meanwhile, domestic sales were flattish YoY on the back of cautious consumer sentiment and downtrading consumption trend. Correspondingly, 1QFY25 PBT dipped 49% to MYR9.1m with opex remaining elevated. QoQ, 1QFY25 revenue was 7% lower, again impacted by the weakness in the export markets whilst 4QFY24 export sales were from a high base aided by backloaded sales. Consequently, 1QFY25 net profit fell 21% QoQ. The first interim DPS of 1.2 sen was declared (1QFY24: 2.5sen).

• Outlook. We understand that more initiatives will be taken to rationalise the opex or staff costs in view of the lacklustre sales momentum and challenging market conditions. Meanwhile, management will be focusing on improving the sales and channel mix in domestic markets to enhance profit margin whereas the focus for export markets will be to drive sales by lifting the efficiency of distributors in key Middle East markets as well as to penetrate into the African region. Notwithstanding the natural FX hedge in place (export sales and imported raw materials), PWRT is still a net exporter and the weak USD should translate to lower earnings going forward.

• Risks to our recommendation include sharp hike/drop in input costs and intense/ease in competition levels.

Source: RHB Research - 28 Aug 2024