By ASILA JALIL
POWER Root Bhd could see earnings growth of over 6% in the next two years as its export sales should grow after global lockdowns introduced to curb the spread of Covid-19 are lifted.
As such, AmInvestment Bank Bhd (AmInvest) is keeping a ‘Buy’ call on the producer of premixed instant beverages with a higher fair value of RM2.55 per share.
The research house raised its earnings forecast for Power Root’s financial year ended March 31, 2020 (FY20), FY21 and FY22 by 6.7%, 6.2% and 5.5% respectively.
Its positive view is in anticipation of a strong earnings recovery for the firm from streamlining of costs and expected growth in sales abroad.
The beverage company’s scarcity premium for exposure to the instant coffee segment also plays a role as it’s “the closest to a pure-play in the segment” and having a decent estimated dividend yield of 4.5% to 5.8% from FY20 to FY22.
“Although the Movement Control Order (MCO) has been extended till May 12, 2020, we believe demand for Power Root’s products will remain relatively stable as they are the basic necessity goods,” AmInvest wrote in a research note last week.
The company’s local and export sales are believed to have benefitted from panic buying that occurred during the early stages of the MCO, as well as lockdowns implemented in the group’s export markets such as China, Singapore and the Middle East and North Africa (MENA) region.
This is, however, expected to be partly offset by lower subsequent sales due to consumers having 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 four percentage points year-on-year in FY20,” AmInvest said.
Power Root’s net profit tripled to RM28 million in FY19 from RM9.11 million the year prior, although revenue fell to RM338 million from RM392.78 million previously.
Its exchange filings throughout the year attributed the increase in earnings to favourable sales mix; lower impairment on property, plant and equipment; lower writedowns of inventory; decreased advertisement and promotion spending; and lower operating and staff costs.
For the third quarter ended Dec 31, 2019, the company’s net profit soared 87.4% to RM13.08 million from RM6.98 million the year prior, as revenue jumped to RM101.37 million from RM81.87 million previously.
The increase was mainly due to higher overseas sales and reversal of impairment loss on trade receivables.
The group’s advertising and promotion spend is expected to decline in FY20 as advertisements and product launches are postponed to a later date due to the MCO, AmInvest said.
A significant negative impact on the company’s cost is not expected, although the beverage firm experienced minor disruptions to its supply chain and with its distributors during the early stages of the MCO. The issues, however, have since been resolved.
Key risks to AmInvest’s call on the firm are a slowdown in export sales, a sharp rise in commodity prices and political unrest in its export markets.
Power Root’s shares closed unchanged at RM2.27 last Thursday — the last trading day of the week before Labour Day — valuing the company at RM922.68 million.