Power Root to see improved earnings on new strategies

Kenanga Research expects a projected net margin of 11% in FY20 for Power Root

by FARA AISYAH/ pic by www.powerroot.com

POWER Root Bhd’s earnings are expected to improve on the back of fresh strategies planned by the new management.

Its share price has increased by more than 35% year-to-date (YTD), gaining some RM201.89 million in market capitalisation in the first seven-month period alone.

The counter closed two sen or 1.07% higher at RM1.89 last Friday, giving it a market cap of RM748.18 million.

“Power Root is poised to see better growth trajectory for both its local and export markets going forward, banking on its streamlined distributors profile; implementation of new operational system to enhance cost efficiencies; and introduction of new products to tap into the evolving consumers’ palate,” Kenanga Investment Bank Bhd (Kenanga Research) noted in a report last week.

The good news is further buoyed by more favourable hedged positions for raw materials, mainly coffee, which would keep its processing margins fairly stable, the investment bank stated.

It added that Power Root is poised to start anew with its fresh strategies to drive growth through new product launches and expansion of brand presence overseas as majority of the rationalisation exercises completed with its streamlined operational processes settling in place.

As such, Kenanga Research expects Power Root’s margins to improve, with a projected net margin of around 11% in financial year 2020 (FY20).

The research firm said the improved outlook is backed by the company’s rosy growth trajectory, which can only be further strengthened by its strong balance sheet and decent dividend yield of around 5%.

Kenanga Research holds an ‘Outperform’ call on the counter, with a revised target price (TP) of RM2.30 from RM1.75.

The revised TP is based on a higher price-to-earnings (P/E) ratio of 20 times, which is in line with its three-year mean, as investor confidence could reemerge on the group’s improved outlook as the issue concerning its distributors is close to being cleared.

Kenanga Research added that on top of a rebound from an unfavourable operating environment resulting in meaningful earnings growth potential, the stock also provides a solid dividend yield of around 5% compared to large-cap food and beverage (F&B) players’ average dividend yield of around 2%.

RHB Research Institute Sdn Bhd said Power Root’s new management’s initiatives to rationalise and improve operations have borne fruit.

“New product launches, restructuring in distribution network and the adoption of new technology should propel FY19 to FY22 forecast (FY19-22F) earnings compounded annual growth rate to 13%.

“We like the stock for its earnings’ recovery momentum, generous dividend payout and sturdy balance sheet. It is unjustifiably trading at 16.5 times FY20F P/E, below sector average even after a greater than 30% YTD share price gain,” it noted.

The research house said Power Root’s FY19 core net profit more than doubled YoY largely due to the sound strategies implemented by the new management, which took over in early 2018, further aided by the easing of key raw material prices including coffee and sugar.

Among the changes made: The company has restructured some of its underperforming distribution networks and has moderated advertising and promotion (A&P) spending to be more targeted and return on investment-driven.

Power Root is also banking on a more effective tracking system to improve the efficiency of its ordering system and inventory management.

Its margin expansion should be underpinned by the favourable movement of key raw material prices, while the management remains prudent in A&P investment.

RHB Research raises Power Root FY20F-FY22F net profit by 4% to 6%, which is broadly in line with the management’s guidance.

The firm also maintains a ‘Buy’ call on the counter with a higher TP of RM2.19.