Despite earnings growth no longer being the key value proposition for Power Root (PWRT), RHB Research (RHB) continues to like the stock as they expect it to sustain the high earnings base supported by quality product offering, entrenched brand equity and efficiency gain.
In addition, generous dividend payout is expected to remain thanks to healthy cash flow generation and sturdy balance sheet.
“We gather that the sales growth momentum has shown signs of slowing down. YoY, 1QFY24 revenue was flat at RM112m, with the slight uptick in export sales (+2%) more than offset the softness in domestic sales (-1%),” said RHB in the recent Malaysia Results Review Report.
On the other hand, relatively stable raw material costs and prudent cost control expanded earnings before interest, tax, depreciation and amortisation by 0.5 ppt to 18.6% and drove 1QFY24 earnings before interest, tax, depreciation and amortisation higher by 3%.
Meanwhile, 1QFY24 revenue was also flattish QoQ similarly supported by robust export sales. That said, net profit fell 13% QOQ on higher marketing spend and higher effective tax rate of 17% from 14% in 4QFY23. DPS of 2.5 sen was declared for 1QFY24.
The subdued growth momentum could persist into 2QFY24F as the company observed soft consumer sentiment which RHB thinks was likely dented by inflationary pressures and uninspiring income outlook.
As such, RHB believes PWRT will invest in marketing engagement in order to spur spending, whilst at the same time, continue to enhance its operational efficiency to mitigate the challenges.
“Meanwhile, we understand that the sharp rise in sugar prices, if it persists, may lead to material cost spikes but prices of other key ingredients have stayed relatively stable,” said the research house, maintaining the Buy rating and a Target Price of RM2.39.
Risks to RHB’s recommendation include a sharp rise in input costs and intense competition.
