This article first appeared in The Edge Financial Daily on September 10, 2019

KUALA LUMPUR: Power Root Bhd’s powerful share price rally, though justified, may need more than an energy drink before firming further, some analysts said.

Opinions are split on whether there is space for a further share price appreciation after the counter hit an all-time high last Thursday, according to the analysts contacted by The Edge Financial Daily.

The stock, closing at RM2.10 last Thursday, has risen 77% from its one-year low of RM1.18 on Dec 11, 2018. Last Friday, Power Root settled at RM2.07 with 810,700 shares traded and a market capitalisation of RM819.85 million.

According to Bloomberg, as of last Thursday, all four analysts covering the stock had “buy” calls on the counter, with a 12-month consensus target price (TP) of RM2.30. Their respective TPs were between RM2.19 and RM2.49, with the top-end range implying available space for another 20% rally for Power Root over 12 months.

However, a fund manager anonymously told The Edge Financial Daily that a further 20% rally would raise eyebrows despite saying the recent share price rally is justified.

“The company’s (Power Root) fundamentals are good, but if it suddenly rises a further 20%, it could be a cause for concern,” the fund manager said, adding that the stock is “currently priced on the high side”.

However, the fund manager is positive about the consumer sector overall, and intends to still hold his existing Power Root shares.

A research analyst requesting anonymity concurred, saying the stock is fairly valued currently and that any reactions to the group’s planned expansion have been priced in as well.

“As of now, there is nothing to suggest a further rally in the group’s share price,” said the analyst.

On the contrary, RHB Research analyst Soong Wei Siang feels the stock’s recent share price rally may not have peaked yet.

“We believe the run still has legs, and see further room for a valuation rerating. Power Root’s current valuation [of 17 times forecast 2020 price-earnings ratio (PER)] represents more than [a] 50% discount, which is sizeable, vis-à-vis peers’. The valuation could catch up given its relatively higher earnings growth and a more attractive dividend yield,” Soong said in a Sept 5 note.

In the note, Soong maintained his “buy” call and raised his discounted cash flow-derived TP from RM2.19 to RM2.49, implying a 20% upside and an approximate yield of 4%. The TP implies a valuation of 21.6 times 2020 forecast PER.

Soong wrote that Power Root’s recent share price run reflects a significant improvement in the company’s financial performance, as well as a positive outlook rooted in the group’s efforts to lift its efficiency.

“The scarcity premium comes into play, as the market continues to pursue defensive syariah-compliant stocks offering visibility in earnings and decent dividend yields,” Soong added.

Soong elaborated that it is unrealistic to compare Power Root with similar counters such as Nestle (Malaysia) Bhd and QL Resources Bhd trading at more than 40 times PER.

Instead, the 23 to 24 times PER in the brewery sector is a better fit due to similarities in the manufacturing and distribution of fast-moving consumer goods, plus generous dividend payouts.

Penetrating China

On Power Root’s further penetration into China, the fund manager said investors must be mindful that revenue generation is likely slower initially, as it has to firstly promote and advertise its products there.

While maintaining the stock may have plateaued currently, the fund manager feels “the group’s entry into China has tremendous potential”, adding that “if it successfully penetrates the Chinese herb market — difficult given existing competitors and the costs of penetrating it (the Chinese market) — it should be able to deliver stronger earnings”.

“I would also look at the cost and revenue structure moving forward, as it will have to deal with additional costs for its (Power Root) China operations,” according to the fund manager.

He added that the group, known for its Tongkat Ali, Alicafe and Ah Huat brands, should be able to deliver stronger earnings in the next 12 months, as it has the capability to do so.

Power Root, in an interview with Bloomberg last week, said it is planning to sell more of its rainforest herb-infused coffee in China, and that it will sell its products online, focusing on suppliers, flagship and speciality stores there.

In a note dated Aug 30, AmInvestment Bank Research said the group had “revamped its online business model by setting up a dedicated and experienced online sales team to expand the market”.

Another analyst noted that local demand for Power Root’s products is not expected to wane. Meanwhile, the group is starting to see results from its operations in the Middle East and China.

“I think it is starting to get back some return on investment from its marketing and distribution activities abroad,” the analyst said.

The analyst expects the group to yield similar earnings as those for the first quarter ended June 30, 2019 (1QFY20).

For 1QFY20, its net profit leapt 33.2% year-on-year (y-o-y) to RM12.18 million, from RM9.14 million for the corresponding quarter last year, translating into higher earnings per share (EPS) of 3.10 sen versus 2.10 sen last year.

Power Root also declared a first interim dividend of two sen for FY20, with an entitlement date of Sept 17 and an ex-date of Sept 13.

Revenue, however, grew much slower at 5.58% y-o-y to RM94.23 million, from RM89.25 million for 1Q last year.

The group attributed its higher quarterly net profit and revenue to improved sales and a favourable sales mix.

In the short term, the group’s earnings are seen in a recovery mode and expected to be positive within four to five years.

Some analysts opined that as long as the group still sees success in its efficiency-boosting measures and also those of its marketing and distribution abroad, it should be able to deliver positive earnings growth in the short to medium term.

Therefore, it will be interesting to see whether investors will still be drawn to Power Root shares, particularly when it starts drawing more Chinese consumers.