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This article first appeared in The Edge Financial Daily on September 25, 2017

KUALA LUMPUR: Malaysians are spoilt for choice when it comes to instant coffee sachets at supermarkets.

This is good for consumers but not Power Root Bhd, one of the local instant coffee sachet producers. The intense competition has disrupted its earnings growth momentum for the past few financial years.

For the first financial quarter ended June 30, 2017 (1QFY18), the company’s net profit plunged to RM2.82 million, down 70% from RM9.4 million in the previous corresponding quarter. Revenue, however, grew slightly by 4% to RM109.23 million from RM105.08 million a year ago.

This is a sharp contrast to the 58% jump in its net profit to RM9.35 million in the preceding financial quarter ended March 31 from RM5.9 million a year ago.

Its share price has also taken a beating, falling from the peak of RM2.62 in late May to a low of RM1.90, down 27.5%. It closed at RM2.06 last Thursday.

That said, fierce competition has driven Power Root to expand its exports in order to make up for the loss.

“Domestically, it is intensely competitive whereby players are embroiled in some sort of price war. It is going through a rationalisation period,[so] we will see some players eliminated,” Power Root executive director See Thuan Po told The Edge Financial Daily through email.

While acknowledging the tough operating environment at home, See noted that Power Root has seen steady growth of its exports, particularly in the Middle East and North Africa (Mena) region.

“The outlook (overseas) seems brighter compared to the local scene despite economic weakness in the Mena region. The fast-moving consumer goods segment is somewhat insulated as compared to other industries in that region,” he said.

Commenting on the latest quarterly earnings, See attributed the drop in net profit to increase in raw material costs, higher advertising and promotional spending incurred for the promotion of Alicafe Signature French Roast in Mena, as well as a foreign exchange loss of RM3 million in the financial quarter under review.

He said local sales experienced a 5% decline in the 1QFY18, while export sales grew 17%.

The higher advertising and promotional spending incurred on the promotion of Alicafe Signature French Roast may have weighed down its profits, but it had boosted export demand in the 1QFY18 as it received favourable reception within Mena.

Exports to Mena currently contributes 79% to its total exports, with the rest coming from China and Singapore. Overall, however, exports generated close to 47% or RM51.2 million to Power Root’s total revenue of RM109.2 million in the 1QFY18, whereas domestic sales accounts for the remaining 53% or RM58 million of revenue.

Moving forwards, the group foresees the possibility of exports being the larger contributor to its earnings.

See is positive the group will perform better in the coming quarters. He said the group’s focus now remains on Mena.

The group had recently acquired an additional 6% stake in its subsidiary Power Root ME FZCO, giving it a new total ownership of 97%. The remaining 3% is owned by Arthur Chin Thiam Nyen. The group will not purchase the remaining shares in the near future.

Kenanga Investment Bank Bhd said in a report that although hiccups could persist in the FY18 due to higher commodity prices, it believes the group’s medium-term outlook in FY19 is relatively intact.

As part of the group’s efforts to ramp up export growth in Mena, Power Root has planned to set up a production facility in the United Arab Emirates, where Power Root ME FZCO is based.

With an estimated cost of between US$14 million (RM58.80 million) and US$15 million, See said the blueprint of the facility – a manufacturing plant – is at the stage of finalisation with groundworks having been completed.

“The plant is expected to come online by the end of 2019, with an expected monthly production capacity of approximately 130,000 cartons of instant coffee powder,” said See.

Nonetheless, some investment analysts believe there might not be urgent need for Power Root to set up a new plant, noting that running a separate plant would add to operating costs, which in turn will eat into its profit.
 

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