KUALA LUMPUR: Power Root Bhd, which produces beverages under the brands Ali Cafe, Per’l Cafe, Oligo Café and Ah Huat White Coffee, expects a challenging year ahead as consumers tighten their belts and become more selective about what they spend their money on.

However, it has no plans to slow down its marketing activities as it sees a period of opportunity to differentiate itself from competitors.

Power Root executive director See Thuan Po said the challenge is for the group to stand out, knowing that market conditions are going to be tough.

“When consumers become more selective, the need to differentiate becomes pertinent. For Malaysia, we will still be aggressive in advertising and promotions (A&P),” he told The Edge Financial Daily in an interview.

See said Power Root usually allocates between 15% and 20% of its annual revenue for A&P investment. This year, the group will spend “a little more”, though still within the range.

For financial year 2013 ended Feb 28 (FY13), it spent RM47.96 million or 17.2% of its revenue of RM237.35 million for marketing and advertising, up 15.4% from the previous year.

Despite the tough year ahead, See said the group is seeking to maintain its profit margins. For its third quarter ended Nov 30, 2013 (3QFY14) and the nine months to Nov 30 (9MFY14), its pre-tax profit margin stood at 16% and 17.9% respectively, close to its previous corresponding periods.

“We are not going to increase prices as yet. The company is still deciding on its next course of action,” he said.

On the recent removal of the sugar subsidy, See said it is expected to have a RM3 million per year impact on the group, which was  2.4% of raw material costs of RM124.57 million in FY13.

See said this year the group also plans to launch new variants and improved versions of its existing range of products.

See pointed out that Power Root is satisfied with the market performance of its Ah Huat White Coffee product, which was launched in 2012.

He said the product is currently registering sales of RM3 million a month, but expects this figure to grow. Ah Huat White Coffee is available in Malaysia, Singapore, Hong Kong and China.

See also said each of its products is targeted at different market segments. For example, its Ali Cafe product has successfully penetrated the Middle Eastern market, its Per’l Café range is targeted at female consumers while Oligo Café is popular among Singapore consumers.

Power Root currently exports to 36 countries worldwide.

For 3QFY14, Power Root reported a 2.1% increase in net profit to RM8.67 million from RM8.49 million in its previous corresponding period. This is on an 8.3% rise in revenue to RM75.89 million.

For 9MFY14, revenue and net profit rose higher at 15.4% and 10.9% respectively, to RM234.75 million and RM28.18 million.

Year-to-date, local sales contributed 70% to group revenue, while exports made up the remaining 30%.

“For FY14, local sales grew because of Ah Huat White Coffee and Ali Café. We were expecting exports to pull in the weight, but it’s actually [local demand] that has pulled through. Nonetheless, if one excludes Egypt, exports have also done fairly well,” he said.

See said sales from the Middle East, which contributed 80% or RM75 million of its RM94 million export sales in FY13, had taken a battering. That was because sales in one of its key markets — Egypt, which contributed RM28 million or 37% of total export sales in FY13 —had come to a standstill due to the political turmoil there. For 9MFY14, Egypt only contributed about RM3 million to RM4 million to the group’s revenue.

Power Root has made a RM5.7 million provision in its FY14 accounts for impairment loss on trade receivables.

Nonetheless, the group is maintaining its growth prospects in the Middle East, with growth still coming strong from Saudi Arabia and the United Arab Emirates (UAE).

See said plans to set up a second manufacturing plant in the UAE remain in place, once it reaches a critical mass of RM130 million to RM150 million sales from the Middle East and North Africa region.

Power Root currently manufactures beverage products, which are fortified with two main rainforest herbs called tongkat Ali and kacip Fatimah, at its plant in Taman Perindustrian Sri Plentong, Johor Baru.

The plant has two lines — powder and can — which are currently at about 90% utilisation.

See noted that the factory still has available space to add machines, which could increase its capacity by another 20%-30%.

From FY10 to FY13, revenue has grown 82.5% from RM153 million to RM279 million. Net profit rose at 246.5% in the same period, from RM10 million to RM35 million.

An analyst from Kenanga Research noted that Power Root’s net margin expanded from 6.6% to 12.6% in the same period due to increased operating efficiency and economies of scale.

“Heavy marketing efforts and the new Huat Ah! movie should lift Power Root’s brand awareness and profile,” the analyst told The Edge Financial Daily.

Based on the closing price of RM1.93 last Friday, and annual dividend per share of seven sen for FY13, Power Root stock yields about 4.15%. Year-to-date, the stock has risen 70%.

This article first appeared in The Edge Financial Daily, on February 24, 2014.