Power Root Bhd’s (Power Root) sales and net profit is expected to reaccelerate from 4QFY24F based on a key drivers such as export sales to the Middle East and progressive price hikes across its Middle East markets, according to CGS-CIMB.
In its Company Update today (Dec 13), it keeps its ADD call with a GGM-based TP of RM2.20, from RM2.80 (17.5x CY25F P/E).
“The revision reflects 10-22% cut in FY24-26F EPS, and switch to GGM valuation (21.4% FY26F ROE, 8.7% COE and 4% long-term growth) to better capture the group’s medium-to-long term FY24-26F profitability and growth trajectory,” it said.
The research house it stays constructive on Power Root’s growth prospects due to the expected sharp rise in sales and net profit, post-briefing after the group’s 2QFY3/24 results was posted.
“(The expected increase in sales and net profit growth) is premised on a few key drivers including export sales to the Middle East to regain momentum from restocking activities, and higher sales contributions from Saudi Arabia as its new distributor ramps up sales initiatives.
“(Besides that), progressive price hikes across its Middle East markets (31.7% of 1HFY24 sales) until year 2025F and margin expansion on lower input costs as it has locked in its raw material requirements such as coffee and creamer) at favourable prices until Sept 2024F, ” it said.
Other reasons included is higher economies of scale on higher utilisation rate compared to between 50 and 55% in 1HFY24.
CGS-CIMB also expects to see a recovery in Power Root’s domestic sales, supported by the government’s expansionary policy with direct cash-handouts and potential civil servants’ upward salary revisions in 2024F.
Aside from that, the research house said the group’s management said the group’s brand building in driving future growth is effective.
Tt said the group’s premium Frenche Roast product domestic sales grew 26% year-on-year (YoY) in 1HFY3/24, accounting for 9% of sales compared to 5% in FY23 while its Ah Huat product sales also grew YoY, driven by its ongoing promotional and marketing campaigns.
“We believe this underscores the effectiveness of its ongoing brand-building initiatives such as targeted influencer and contest marketing campaigns, which could further help drive its sales momentum from 4QFY24F onwards.
“Management also shared that it observed solid demand for its new Jom Teh brand, which is its new product launched in Sep-23 to penetrate the 30 sachets 3-in-1 premix tea segment and is on track to achieve its target of RM3 million to RM5 million sales in FY24F.
“We believe this is a sign of its R&D strength. In addition, management also said it would be enhancing its product packaging designs for its energy drink and Oligo brands in 2HFY24F/FY25F, making its products more competitive,” CGS-CIMB said.
“We like Power Root for its strong brand equity in the instant coffee segment, undemanding valuations at 14.4x CY25F P/E (24% discount
to 10-year average of 19x), and appealing yields of 5-6% (FY24-26F),” it added.
The group has a strong net cash of RM116 million as at 30 Sep 2023.
The research house said reacceleration in sales and margin expansion are re-rating catalysts while downside risk include slowdown in sales and elevated input cost hurting margins.
