PWROOT guided for a top line growth of 6%-8% in FY24 mainly driven by exports. Meanwhile, the domestic market will continue to be driven by Ali Café which is quite popular in the Malay heartland or the northern belt. The recent agreement entered into with a new Thai partner allows PWROOT to tap into RM2.6b coffee market in Thailand, as well as in Indochina. We maintain our forecasts, TP of RM2.70 and OUTPERFORM call.

We came away from a recent engagement with PWROOT feeling reassured of its prospects ahead. Here are the key takeaways:

1. PWROOT guided for a top line growth of 6%-8% in FY24 mainly driven by exports (which is in line with our assumption of a 7% growth). It recently inked an MOU with a new distributor in Saudi Arabi while the East Asian market will be boosted by a co investment with a local distributor in Thailand which will come online by Sep 2023. Meanwhile, the domestic market will continue to be driven by Ali Café which is quite popular in the Malay heartland or the northern belt i.e. Perlis, Kedah, Kelantan and beyond, i.e. southern Thailand. There is also the full-year impact of three price hikes in FY23.

2. PWROOT is cautious on rising input costs. It has locked in coffee bean supply for a year and creamer up till Sep 2023. PWROOT will defend its margins by: (i) cutting back on promotions, (ii) reviewing selling prices with the possibility of hikes in Sep 2023, and (iii) talking to more suppliers in order to get the most competitive prices for its inputs.

3. PWROOT shed more light on its recent 60:40 co-investment agreement it entered into with Thailand-based SAPPE Holding Thailand Company Ltd (SAPPE). The rationale is two-fold. Firstly, the agreement allows PWROOT to tap into the RM2.6b coffee market in Thailand, as well as in Indochina with its Frenché Roast instant coffee products. PWROOT will supply raw and packaging materials while SAPPE will handle the packaging and distribution of the finished products. For now, the capital outlay is THB20m (RM2.7m) for working capital purposes to be shared in accordance with the equity structure. Beyond a 12-to-18-month horizon, there are plans to set up a RM10m production facility in Thailand. Secondly, the agreement also grants PWROOT the exclusive distributorship of SAPPE’s fruit juice with added nata de coco (coconut gel) Mogu-Mogu drinks in Malaysia.

Forecasts. Maintained as we had already generally imputed these assumptions.

Consequently, we maintain our TP of RM2.70 based on an unchanged 19x FY24F PER. At 19x, we value PWROOT at a discount to the average historical forward PER of 22x for the food and beverage sector, to reflect PWROOT’s less extensive product range vs. peers. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We like PWROOT for: (i) resilient domestic demand despite price hikes, (ii) the strong recovery in the export markets plus its expansion into new markets in Asia, (iii) its ability to pass on rising costs to consumers backed by resilient demand, (iv) its competitive pricing, (v) it being shielded from input costs volatility via forward buying and widening its suppliers base, and (vi) attractive dividend yields, surpassing pre pandemic levels. Reiterate OUTPERFORM.

Risks to our call include: (i) sustained high inflation hurting consumer spending, (ii) a further weakening in MYR resulting in
higher costs for imported inputs, and (iii) rising food commodity prices.

Source: Kenanga Research - 12 Jun 2023