Investment Highlights

• We maintain BUY on Power Root with an unchanged fair value of RM2.67/share based on a FY24F PE of 18x. This is 0.5 standard deviation below the group’s 3-year average PE of 21x and on par to the mean historical forward PE for the F&B sector. We make no adjustment to our neutral ESG rating of 3-stars.

• We make no changes to FY24F – FY26F earnings as the impact from the collaboration with Sappe PCL in the initial stage will be minimal.

• Power Root signed a co-investment agreement with Thailand’s Sappe PCL on 9 June 2023 to become the sole distributor of the Thai nata de coco drink under Mogu Mogu brand in Malaysia.

• Power Root will hold a 60% stake in the joint venture while Sappe will hold the balance 40%. Initial investment is estimated to be 20mil baht (RM2.7mil), out of which Power Root will contribute up to 12mil baht (RM1.6mil) while the remaining 8mil baht (RM1.1mil) will come from Sappe. The project period is 1 to 1.5 years. 

• 3 flavours will be introduced, and 15 containers of the products will be signed. These will be sold mainly in convenience stores and petrol stations. In terms of contribution, the group has an initial target sale of 2% of the total domestic sales. Local sales accounted for 56% of the group’s total revenue as at end 4QFY23. Given that the product is scheduled to be released in September 2023, the impact on FY24F earnings is expected to be minimal and a more meaningful contribution is only anticipated in FY25F. Our estimates show that a 1% increase in the group revenue could potentially increase FY25F bottomline by 4%. This assumes that earnings will be consolidated given that the 60% stake in JV will be held by Power Root.

• On the other hand, Sappe will be selling the Frenche Roast brand for Power Root in Thailand. Raw materials and packaging items will be provided by Power Root while Sappe will fill and pack the final goods before distributing them to the market. Brand building will be the focus at this stage. If the products are successful, Sappe may distribute them to Indochina.

• Sappe is one of Southeast Asia’s top beverage companies listed on the Stock Exchange of Thailand (SET) with a market capitalisation of over US$700mil (RM3.2bil). Its Mogu Mogu brand commands a market size of US$300mil (RM1.38bil).

• Meanwhile back in March 2023, Power Root appointed a new company i.e., Abbar Foods in Saudi Arabia to distribute powdered Alicafe and Alitea. Abbar Foods has a wide distribution network of 8,500 touchpoints in Saudi Arabia.

• On a side note, Power Root is also expanding the tea segment, where it has identified opportunities in the 30 sachets 3-in-1 space. A new brand is expected to be launched in 3QFY24.

• We continue to like Power Root on 1) improving export markets, 2) pricing power to some degree, and 3) better operational efficiencies and on-going hedging events that could safeguard its margin.

• At 14x FY24F PE, Power Root is trading below its historical 3-year mean of 21x and sector average of 18x while offering an attractive dividend yield of close to 6%.

Source: AmInvest Research - 12 Jun 2023