PWROOT's 1QFY25 results missed expectations due to higher-than- expected operating costs. Its 1QFY25 net profit fell 52% on lower sales from the overseas markets coupled with high operating costs. We cut our FY25-26F net profit forecasts by 12-6%, respectively. Correspondingly, we reduce our TP by 9% from RM1.40 to RM1.28 (on calendarised CY25 earnings) and maintain our UNDERPERFORM call.

PWROOT’s 1QFY25 net profit disappointed, coming in at only 17% of our, and 14% of the street’s, full-year estimate. The variance against our forecast came largely from higher-than-expected operating costs. It declared a DPS of 1.2 sen, translating to a payout of 76%.

YoY, PWROOT’s 1QFY25 turnover declined by 6%, mainly due to a 13% drop in oversea sales, particularly in the Middle Eastern market (-9%).However, local market sales provided some relief with a mild 0.5% increase. EBIT fell sharply by 52%, impacted by the reduced revenue, rising staff costs and higher advertising and promotion expenses, leading to a margin contraction from 16.5% to 8.5%. Consequently, net profit decreased by 52% to RM7.3m.

QoQ, its 1QFY25 turnover decreased by 7% to RM106m, no thanks to a lower sales in both overseas (-13%) and local (-2.5%) markets. PBT fell 23% to RM9m, primarily due to reduced revenue and higher foreign exchange losses. The weak overseas performance was largely due to hefty sugar taxes in the UAE, KSA, and Oman, which led to a 50% price hike for Alicafe products, cutting sales volumes by half. Domestically, challenges arose from a pricing strategy adjustment, narrowing the discount against competitors. Net profit declined by 18%, partially offset by a lower effective tax rate.

Outlook. On the domestic front, we remain cautious on the group's near- term outlook due to subdued consumer spending amid sustained elevated inflation and consumer anxiety over impending fuel subsidy rationalisation. On a brighter note, the progressive salary increase for civil servants effective Dec 2024 should at least partially restore consumer spending power. The ongoing geopolitical instabilities have created challenges in the global retail landscape, particularly impacting demand and causing supply disruptions in Middle Eastern markets. Fluctuations in commodity prices and foreign exchange rates will continue to exert pressure on costs.

Forecasts. We cut our FY25-26F net profit forecast by 12-6%, respectively, to reflect the softer sales and higher operating costs.

Valuations. Correspondingly, we trimmed our TP by 9% to RM1.28 (from RM1.40), based on blended CY25 EPS (previously FY25 EPS) with an unchanged targeted PER of 15x. This is still at a discount to the average historical forward PER of 22x for the food and beverage industry players to reflect PWROOT’s less extensive product range vs. its peers.

Investment case. We remain cautious on PWROOT due to: (i) the intensifying competition in the local premix coffee market, (ii) its seemingly eroding foothold in its key export market, i.e. the Middle East, and (iii) persistently high food commodity prices. Maintain UNDERPERFORM.

Risks to our call include: (i) a significant recovery in sales in th domestic and Middle Eastern markets, (ii) lower food commodities prices and (iii) reduced competition as weak players exit the premix coffe market.

Source: Kenanga Research - 28 Aug 2024