KUALA LUMPUR (May 29): RHB Research has maintained its "buy" rating on Power Root Bhd at RM2.24 with a higher target price of RM2.96 (from RM2.80) and said Power Root delivered commendable fourth-quarter results, which beat expectations as management's transformation plan continued to bear fruit.

In a note today, RHB's Soong Wei Siang said the positive stance on the stock is premised on sustainable earnings growth underpinned by robust top-line growth on the back of new product launches and market penetration.

"On top of that margins should stay healthy, supported by cost-optimisation initiatives and effective marketing investments," he said.

He added Power Root reported financial year 2020 (FY20) core net profit of RM53.1 million, up 53% year-on-year (y-o-y), which exceeded house and consensus forecasts by 7% and 10%, respectively.

"The positive deviation could be attributed to the higher-than-expected efficiency gain and cost savings achieved thanks to management's efforts in rationalising business and optimising cots. Post-results, we revise up FY21F-22F earnings by 5%-8%. We also take the opportunity to introduce FY23F, which implies 8.9% growth," he said.

On the other hand, Soong said the y-o-y FY20 sales jumped 14.2% with contributions from both export (+20.5%) and domestic (+7.6%) markets. This was likely to be driven by new product launches and market penetration.

"Meanwhile, the above-mentioned efficiency gain and favourable FX propelled profit before tax (PBT) margin to expand by 5.3% [percentage points], resulting in a 69.3% surge in PBT. FY20 dividend per share of 11.5 sen was a positive surprise, representing a 98% payout ratio," he said.

Additionally, Power Root was largely unaffected by the Movement Control Order (MCO) as its business is classified as essential, while full-operational capacity resuming by the end of April.

"Essentially, we believe earnings growth momentum can be sustained moving forward. In summary, management will continue its business rationalisation initiatives to streamline and optimise productivity of its operations. These range from inventory management to sales and distribution network, as well as advertising and promotional investments.

"The company has also identified top-line growth opportunities by penetrating further into export markets. This, together with favourable commodity prices, should propel earnings growth," he said.

At 9:15am, Power Root's share price rose 11.61% or 26 sen at RM2.50 with a market capitalisation of RM910.89 million.