Investment Highlights

• We maintain our BUY call on Power Root with a higher FV of RM2.55/share. Our FV is based on a PE of 18x CY21F EPS. Our PE multiple is in line with Old Town’s 2-year average forward PE. We raise our earnings forecasts for FY20F, FY21F and FY22F by 6.7%, 6.2% and 5.5% respectively.

• We continue to like Power Root because of: 1) its strong earnings recovery from streamlining of costs and expected growth in its exports sales; (2) its scarcity premium for exposure to the instant coffee segment as Power Root is the closest to a pure play in the segment; and (3) a decent estimate dividend yield of 4.5–5.8% from FY20F to FY22F.

• Although the movement control order (MCO) was extended for the third time, until 12 May 2020, we believe demand for Power Root’s products will remain relatively stable as they are basic necessity goods.

• We believe that Power Root’s local and export sales benefited from panic buying during the initial stages of the MCO as well as lockdowns initiated in the group’s export markets like China, Singapore and the MENA region. However, these are expected to be partly offset by lower subsequent sales as consumers will have excess supply at home. Going forward, as the lockdowns end and business activities start to pick up in China and the MENA region, the group’s exports sales are expected to improve.

• We estimate the group’s margins to grow around 4ppts YoY in FY20F. The group’s A&P spend is expected to decline in FY20F as advertisements and product launches are pushed to a later date due to the MCO.

• We believe the group will also continue to benefit from cheaper raw material prices as shown in Exhibits 1–4. Coffee prices have been locked in until June 2021.

• Net margins will be slightly pressured in 4QFY20 by higher cost of labour during the MCO where the group has to manage its workers to fulfil the 50% requirement (80% after MITI approval), there were more overtime and incentives incurred during this period. However, this is now mitigated as MITI has allowed full workforce starting 29 April 2020.

• The group experienced some minor disruptions to its supply chain and with its distributors at the initial stages of the MCO but the issues have since been resolved. Hence we do not expect a significant negative impact on its costs.

• Power Root’s expansion plan in Dubai is now put in the back burner.

• Key risks to our forecast are: (1) a slowdown in export sales; (2) a sharp rise in commodity prices; and (3) political unrest in its export markets.

Source: AmInvest Research - 30 Apr 2020