• Maintain NEUTRAL, with new TP of MYR1.37 from MYR1.51, 4% downside. Power Root’s 1HFY25 (Mar) results trailed estimates due to the persistent export market weakness. Sentiment on the stock could stay muted given the uncertainty over exports recovery and lower dividend payout. That said, share price may have largely priced in the negatives and the downside could be capped by the active share buyback, with earnings likely to have bottomed already.

• 1HFY25 results below expectations. Net profit of MYR16m (-39% YoY) met only 36% and 37% of our and consensus forecasts due to the weaker-thanexpected export sales. Post-results, we cut FY25F-27F earnings by 14% each. Correspondingly, our DCF-derived TP drops to MYR1.37 (inclusive of a 10% ESG discount) which implies 13x FY26F P/E, or below the stock’s 5-year mean.

• Results review. YoY, 1HFY25 revenue fell marginally by 2% to MYR209m as the drag in export markets (-13%) more than offset the steady domestic sales (+7%). This is the consequence ofthe Saudi Arabia and United Arab Emirates markets being negatively impacted by the proliferating parallel import products. On the other hand, higher staff costs (+15%) and unfavourable FX movement led to a 36% dip in operating profit with margin compressing by 5ppts. QoQ, 2QFY25 revenue was lower by 3% at MYR103m due to the abovementioned challenges in the export markets. 2QFY25 operating margin rebounded by 1.7ppts, aided by lower variable staff costs and marketing expenses but partially offset by the FX losses of MYR2.4m booked in 2QFY25. As a result, 2QFY25 net profit jumped 16% to MYR9m.

• Outlook. With the export market challenges expected to persist in the near term, management is looking to improve the situation by identifying new local partners and other distribution strategies, which will take time to materialise. Meanwhile, management is guiding for a lower dividend payout ratio of c.65% (vs our previous assumption of 85%) to facilitate a drawdown of sukuk by early-2025 to fund future capex plans. On the proposed hike in sugar tax in Budget 2025, the impactto PWRT is minimal as only a handful of energy drinks’ stock keeping units or SKUs (16% of FY24 local sales) are above the sugar content threshold after the earlier reformulation exercise. As for the raise in minimum wage, it will translate to an additional cost of c.MYR1.5m which management expects to be mitigated by progressive upgrades in automation.

• Risks to our recommendations include a sharp hike/drop in input costs and intense/ease in competition levels. 

Source: RHB Securities Research - 22 Nov 2024