Investment Merits

• Robust export sales, further aided by strong USD

• Strategic expansion plan in the pipeline

• Generous dividends supported by a solid balance sheet and healthy cash flows

Company Profile

Power Root, through its subsidiaries, is engaged in the manufacturing and distribution of fast moving consumers goods (FMCG) and beverage products. The company's products come under two categories – instant and tinned, with brands such as Alicafe Premium Gold, Alitea Tarik, Oligo and Per'l Cafe Premium Gold.

Highlights

Robust export sales to drive growth. Export sales jumped 34% YoY and made up 44% of Power Root’s revenue as of 9MFY17 (Mac), with the Middle East being its key export market (77% of export sales). Moving forward, we expect the focus to remain in the region where its products are well received. We believe its commitment to set up a manufacturing plant in the Middle East would help in terms of sustaining sales growth momentum over the longer term. Furthermore, Power Root would benefit from the strengthening USD given the significant contributions from export sales, which are largely denominated in USD.

UAE expansion to underpin long-term growth. Power Root is expected to complete its new manufacturing plant in UAE in 2H18. The expansion plan, which would incur capex of USD13-14m (MYR58-62m) is projected to boost its annual capacity to 3.4m cartons from 1.8m cartons (+1.6m). Assuming production volume of 850,000 cartons at the upcoming plant, it would translate into additional sales of MYR140m (38% of FY16 revenue) based on management’s estimates. The company would also enjoy cost savings from not having to pay/lower import tax that is imposed in the Middle East, which ranges between 5- 25%.

Steady dividend payouts. The company has a policy to distribute 50% of its net profit to shareholders. Even so, it has been paying out c.70% of its net profit over the last two years, supported by its sturdy balance sheet and strong cash flows. We believe Power Root would be appealing to yield-seeking investors as we are projecting 11.5 sen and 12.5 sen dividends to be declared in FY17F-18F, translating into decent yields of 5.3-5.8%.

Company Report Card

Latest results. 9MFY17 revenue grew 10.3% on the back of robust export sales but core net profit was flattish at MYR34.2m due to a high base of comparison – 9M16 sales were aided by post-GST restocking in 1QFY16, while higher marketing expenses were incurred in 9MFY17 vs 9MFY16, which we believe was due to the early timing of the Lunar New Year in 2017.

Balance sheet / cash flow. As of Dec 2016, the company was in a net cash position, with net cash of MYR31.1m, while generating healthy operating cash flows of MYR31.7m during the same period.

ROE. ROEs have ranged between 18-19% over the last few years, and we expect it to be sustained on the back of projected steady business performance.

Dividend. The company has a dividend policy of distributing at least 50% of its net profit to shareholders but its payout ratio has been higher at 70-75% over the last two years. Moving forward, we are projecting 11.5 sen and 12.5 sen of dividends to be declared in FY17F-18F, translating into yields of 5.3-5.8%.

Management. Power Root is managed by three of its major shareholders who founded the company, namely Dato Low Chee Yen, Dato How Say Hwee, and Dato Wong Fuei Boon. All of them possess vast and relevant experience in FMCG and marketing, and in total they hold a 58.4% stake in Power Root.

Recommendation

We like Power Root for its robust export sales, while its commitment to set up a new manufacturing plant in the Middle East should pave the way for positive long term prospects. We value Power Root at MYR2.82 (31% upside), after pegging a 16x P/E to our FY18F EPS of 17.6 sen. The target P/E valuation is on par with what we have ascribed for OldTown (OTB MK, BUY, TP: MYR2.40). Although Oldtown’s key focus export market in China offers a bigger potential and the FMCG commands better profit margin as compared to Power Root, we believe that an equivalent valuation is justified considering that Power Root is a pure FMCG play with no exposure in the higher risk retail F&B business while its dividend payout is more generous.

Source: RHB Securities Research - 5 May 2017