This article first appeared in The Edge Financial Daily on October 23, 2019
Power Root Bhd
(Oct 22, RM2.24)
Maintain buy with a higher fair value (FV) of RM2.42: Our FV for Power Root Bhd is based on an unchanged price-earnings (PE) ratio of 18 times financial year 2021 forecast (FY21F) earnings per share, in line with OldTown Bhd’s two-year average forward PE. We have increased our earnings forecasts for FY20, FY21 and FY22 by 6.7%, 10.3% and 6.6% respectively as we expect better sales growth and margins for the group. We still like Power Root for its strong earnings recovery underpinned by the streamlining of costs and growth in export sales, its scarcity premium as Power Root is the closest to a pure play in the segment and an attractive estimated dividend yields of 4.5% to 5.9% from FY20 to FY22.
Key highlights from our meeting with Power Root are a recovery in export sales as the group restructures its distributorships; the group leveraging its strong brand image in the Middle East and North Africa to continue expanding its market share; and its focus on China to increase online penetration as online spending there is huge. Power Root is expecting further savings from improved production operations and plant automation. These are envisaged to drive down production costs and wastages.
Power Root is continuously introducing new stock keeping units to expand its reach in the market. The group is expecting better growth in upcoming quarters after implementing new strategies in its distribution channels. In the Middle East and North Africa, typically making up about 80% of export sales, the group plans to leverage its well-received Alicafe brand.
Most of the sales in this region are of the classic coffee variety such as Alicafe French Roast and Alicafe Classic Roast. Recall the group’s export sales declined in FY19 as expatriates left Saudi Arabia due to the Saudinisation scheme imposing a higher levy on expatriates and their dependents, reducing Power Root’s customer base in the region. However, we believe the negative impact has passed and demand for Power Root’s products should stabilise moving forward.
In China, Power Root’s sales are driven by the Alicafe and Ah Huat brands, where the products are consumed across the country with a concentration in urban centres. To boost growth, the group has restructured its online business by setting up a dedicated and experienced online sales team. About 75% of the Power Root’s sales in China are done online.
The group is revamping its sum-of-parts and inventory management, as well as adding new equipment to reduce wastages and optimise productivity. As shown in the first quarter of financial year 2020 (1QFY20) results, Power Root lifted its margin with earnings before interest, taxes, depreciation and amortisation (Ebitda) margin of 16%, versus 13.5% in 4QFY19, by driving down costs. We are anticipating its Ebitda margin to be about 16.8% for FY20.
Locally, to cater to a larger customer base preferring “non-functional” beverages, Power Root has launched a new Alicafe range called Warung without Tongkat Ali or ginseng ingredients. The group is emphasising more on increasing the brands’ reach as part of key performance indicators for its distributors. Hence, the group has rolled out a handheld sales force reporting system providing information on real-time distribution network updates. This ensures better monitoring of sales performance in various outlets, in turn allowing Power Root to better strategise its distribution network’s reach and advertising effectiveness. — AmInvestment Bank, Oct 22