PowerRoot (PWROOT) indicated a top line growth of 6%-8% in the financial year 2024, mainly driven by exports, which is in line with Kenanga Research (Kenanga)’s assumption of a 7% growth.
It recently inked an memorandum of understanding with a new distributor in Saudi Arabia 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, for example, Perlis, Kedah, Kelantan and beyond, for example, southern Thailand. There is also the full-year impact of three price hikes in the financial year 2023.
“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 cutting back on promotions, reviewing selling prices with the possibility of hikes in Sep 2023, and talking to more suppliers in order to get the most competitive prices for its inputs,” said Kenanga in the recent Company Update report.
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 RM2.6 billion 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 Thai Baht 20 million (RM2.7 million) 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 RM10 million production facility in Thailand. Secondly, the agreement also grants PWROOT the exclusive distributorship of SAPPE’s fruit juice with added nata de coco Mogu-Mogu drinks in Malaysia. Kenanga maintains Outperform for PWROOT since these assumptions have already been imputed.
“Consequently, we maintain our trading price of RM2.70 based on an unchanged 19x financial year 2024 future price-earnings ratio. At 19x, we value PWROOT at a discount to the average historical forward price-earnings ratio of 22x for the food and beverage sector, to reflect PWROOT’s less extensive product range versus peers. There is no adjustment to our trading price based on environmental, social, and governance, given a 3-star rating as appraised by us,” said Kenanga.
Kenanga favours PWROOT for its resilient domestic demand despite price hikes, the strong recovery in the export markets plus its expansion into new markets in Asia.
Also, PWROOT has the ability to pass on rising costs to consumers backed by resilient demand, its competitive pricing, and is also being shielded from input costs volatility via forward buying and widening its suppliers base. Lastly, PWROOT provides attractive dividend yields, surpassing pre-pandemic levels.
