Power Root Bhd
Power Root (Fundamental: 2.8/3, Valuation: 2.1/3) is one of the country’s top three instant coffee maker and is best known for its Alicafe, Ah Huat and Pearl coffee brands. We like the company for its long-term growth potential, capable management, strong fundamentals and decent dividends, although near-term earnings will be affected by weaker consumer sentiment.
For FYFeb2012–FY2014, net profit more than doubled to RM38.8 million, fuelled by strong growth in both strong domestic and export markets. During the same period, dividends increased from 4.5 sen to 9 sen.
Power Root ended its FY15 with a strong 4QFYMar15 results, boosted by the timely completion of a small property development project in Johor. The project contributed RM40.0 million in revenue and RM10.3 million in net profit.
As a result, it declared a special dividend of 2.5 sen, bring up total dividends for FY15 to 10 sen. This translates into a payout ratio of 70%, or an attractive yield of 4.6%.
Excluding the one-off contribution from property development, Power Root posted RM343.2 million in revenue for 13MFYMar15, compared with RM306.9 million for 12MFYFeb14. Normalised net profit, however, fell to RM36.2 million, from 39.7 million in FY14.
Core net margin for FY15 contracted by 2.4 percentage points, reflecting the softening consumer sentiment and the intensifying competition in the local coffee premix market.
Nonetheless, it has a sturdy balance sheet with a net cash position of RM54.2 million (equivalent to 18 sen per share) to support dividends and tide it over bad times. Going forward, Power Root plans to grow its market share in the Middle East where instant coffee penetration is still low.
The stock trades at fairly reasonable valuations, at an ex-cash normalised trailing 12-month P/E of 16.9 times and P/B of 2.7 times vis-à-vis the F&B industry average P/E of 17 times and P/B of 3.8 times.
This article first appeared in The Edge Financial Daily, on July 20, 2015.