Export Growth Coupled New Product Line-Up, “Buy” Rating on Power Root: RHB IB

(photo credit: Power Root)

Post plant visit, RHB Research is more optimistic of Power Root’s earnings growth prospects. Management guided for stronger export recovery whilst its new brand has cemented a solid position in the markets. Margin outlook is benign in anticipation of more cost pass-through and the strengthening of the USD is earnings accretive. The research house has stated in its research report that “they like the group for its efficiency-hungry management team, established brand equity, and generous dividend payout.”

More export uplift. Having recorded a sharp recovery in export sales in 1QFY23 (+68% YoY), management is upping its guidance after observing favourable consumption normalisation in the key Middle East North Africa (MENA) markets. This could be due to the vibrant economic activities (expatriates returning) in the region on the back of elevated oil prices and
consumers adapting to the higher consumption taxes whilst the FIFA World Cup 2022 in Qatar is another booster. On top of that, it is believed the strengthening of USD and undeterred volume post implementation of price adjustments have also helped.

Firing on all cylinders. After getting off to an explosive start in FY23 with group sales surging 50% YoY to MYR112m, it is believed the momentum will sustain going forward. Frenche Roast, the relatively newer brand has successfully cemented a solid position in the mainstream market thanks to the product quality on the back of its R&D expertise. It is expected to contribute to c.MYR20m or 4-5% to the total FY23F sales. Meanwhile, the new variants of its canned ready-to-drink or RTD energy beverages have also been received well by the markets owing to the rising demand for convenient on-the-go products and effective marketing initiatives.

Favourable operating environment. Price hikes on a relatively more aggressive manner by its major competitors have placed PWRT in a strategic position to capture consumer downtrading under an inflationary environment considering the widening price gaps. In addition, such dynamic renders the group more room for cost pass through, if necessary. As such, the research house pencils in more ASP adjustments on top of the abovementioned better-than-expected export sales to its earnings forecasts – its FY23F-25F earnings are lifted by 9-12%. Correspondingly, its DCF-derived target price (TP) rises to MYR2.60 (inclusive of a 4% ESG discount), implying 21x FY23F P/E, or c.50% discount to the valuation ascribed to the large-cap F&B peers under its coverage.

Hence, RHB Research has maintained “BUY” rating on Power Root, with new TP of MYR2.60 from MYR2.38, 23% upside and
c.5% FY23F (Mar) yield.

Risks to the research house’s recommendation include sharper-than-expected hike in commodity prices and slower-than-expected export recovery.

Salient Points:

Target Price (Return): MYR2.60 (+23%)
Price (Market Cap): MYR2.12 (USD188m)
ESG score: 2.80 (out of 4)
Avg Daily Turnover (MYR/USD) 1.73m/0.38m

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