Post-meeting, we feel reassured on the improved outlook with the overhang of distributors issue close to being cleared. Reiterate our OP call and upgrade TP to RM2.30 (from previously RM1.75) as we continue to like the company for its healthy growth trajectory, underpinned by: (i) rationalised distributor profiles, (ii) improved operational efficiencies, and (iii) new product launches. Decent dividend yield of c.5% and solid balance sheet also act as the cherry on top.
Reaping the fruits. Recap that albeit with lower sales (-14%), the group managed to chalk up a commendable core PATAMI growth (+42%) in FY19 thanks to the group’s efforts to rationalise its distribution network. That said, PWROOT is poised to see better growth trajectory for both its local and exports market going forward, banking on its (i) streamlined distributors profile, (ii) implementation of new operational system to enhance cost efficiencies, and (iii) introduction of new products to tap on the evolving consumers’ palate. Furthermore, this is expected to be buoyed by more favourable hedged positions for raw materials (mainly coffee) which would keep its processing margins fairly stable.
Expanding footprints. On the export front, the group still aspires to ramp up their presence in the MENA region which we believe is spurred by the robust market acceptance in these markets, particularly for their signature product - Ali Café. In addition, we believe with a larger market base in overseas region, which can now be more efficiently tapped into with leaner management methods and new distributorships, will continue to provide exciting growth potential for the group. With its volumes now solely supported by its manufacturing plant in Johor, we do not discount the possibility for the group expanding its manufacturing processes to the MENA region.
New broom sweeps clean. Moving forward, PWROOT is poised to start anew with its fresh strategies to drive growth through new product launches and expansion of brand presence overseas as majority of the rationalisation exercises are completed with its streamlined operational processes settling in place. All-in, this is expected to improve the company’s margins (with our projected net margin of c.11% in FY20 compared to c.5% net margin in FY18). The improved outlook is backed by the company’s rosy growth trajectory, which can only be further strengthened by its solid balance sheet and decent dividend yield of c.5%.
Reiterate OUTPERFORM with higher TP of RM2.30 (from previously RM1.75). Our revised TP is based on a higher PER of 20x (from previously 17x) which is in-line with its 3-year mean, as investor confidence could reemerge on the group’s improved outlook with the overhang of its distributors issue close to being cleared. We also roll over our valuation base year to FY21E. On top of a rebound from an unfavorable operating environment resulting in meaningful earnings growth potential, the stock also provides solid dividend yields of c.5% when compared to the large-cap F&B players’ average dividend yield of c.2%. Hence, we believe there is still upside with the aforementioned key positives remaining intact, in spite of the share price surging c.37% YTD.
Risks to our call include: (i) lower-than-expected sales, (ii) higherthan-expected commodity and marketing costs, and (iii) lower-thanexpected dividend payments
Source: Kenanga Research - 18 Jul 2019