Kenanga Research came away from post-results briefing with Power Root Bhd feeling mixed of its prospects ahead as the group anticipates 10% decline in sales.
In its note today (Dec 4), the research house said Power Root expects a pick-up in sales in Jan 2024 on restocking by its distributors but is mindful of the sustained inflation that eats into consumers’ spending power.
“It is anticipating a 10% decline in its FY24F sales in-line with an 11% decline reported in its 1HFY24 results announced last week.
“Although it expects a pick-up in sales in Jan 2024 on restocking by its distributors but is mindful of the sustained inflation that eats into consumers’ spending power,” it said.
The research house maintains its MARKET PERFORM call, its forecasts, and TP of RM1.95 with no adjustment to TP based on 3-star ESG.
“This is based on an unchanged 15x FY25F PER, at a discount to the average historical forward PER of 22x for the food and beverage to reflect Power Root’s less extensive product range compared to its peers.
“We like Power Root for its competitive pricing, increasing overseas markets contribution plus its expansion into new markets in Asia, Africa and Americas, and it being shielded from input costs volatility via forward buying and locking prices for an extended period.
“However, it will continue to face soft demand from both the domestic and Middle Eastern markets (as evident in the 1HFY24) on macro-economic headwinds and a potential renewed uptrend in food commodity prices.”
The risks to Kenanga’s call include consumer spending hurt by high inflation, ringgit weakness resulting in higher costs for imported inputs, and high food commodity prices.
Kenanga noted that Power Root anticipates rising costs for its key raw materials, namely coffee beans due to reduced harvest, while non- dairy creamer prices are projected to stay stable in the upcoming months.
“Separately, the company expects to alleviate manpower challenges in both the local and oversea markets through recent incentive initiatives, implemented to enhance employee retention,” it added.
Power Root, it added, sees an opportunity to raise the price of its premium Alicafe brand, noting it currently sells at a significant 20% to 25% discount compared to market leader Nestle (Malaysia) Bhd in the Middle East.
“Meanwhile, prices for its more budget-friendly products are expected to remain unchanged, considering the high level of competition in that segment.
“The group experienced a marginal increase in turnover, approximately 10% on its house brand, due to the recent boycott of certain overseas F&B brands, leading to a spillover in coffee demand.
“However, its Oligo coco product did not see any benefits, owing to limited product awareness,” the research house said.
Kenanga said Power Root’s co-investment initiative with Thailand’s Sappe Public Company Ltd (Sappe) has gone live with the commissioning of multi-lane packaging machines with finalised SKU sizing (at 17g, aligning with the local market standard).
Frenche Roast Indulgence and Frenche Roast Signature Blend premix coffee will be the first two products to hit the market in 4QFY24.
Earlier, Power Root an Sappe signed a 60:40 co-investment in June 2023 to allow expansion of its instant coffee business in Thailand while helping Sappe to increase product sales in Malaysia.
