Power Root factory shutdown to have minimal impact on earnings

by LYDIA NATHAN / pic source: powerroot.com

POWER Root Bhd is expected to have a weaker near-term outlook due to the detection of Covid-19 cases in its factory in Masai, Johor.

The food and beverage (F&B) company stated in a recent Bursa filing that operations at its factory will be suspended from July 1 to July 7, 2021, for sanitisation work.

Channel checks revealed there were up to 20 positive cases detected among its estimated total workforce of 300 personnel, CGS-CIMB Research stated in a report last week.

The brokerage noted the affected factory is the facility that manufactures instant pre-mixed beverages (IP), which makes up an estimated 75% of the group’s FY3/21 total revenue.

In a research note, CGS-CIMB Research added Power Root’s earnings bottomed in 4QFY3/21 due to lower export sales and higher raw materials costs, with the conditions most likely to continue.

“This is on the basis of rising raw material prices, lower economies of scale, lower consumer demand to the pandemic and lower production volume due to the recent re-implementation of the Movement Control Order,” it noted.

However, CGS-CIMB Research added the impact of the one-week loss of operations of its IP facility will be minimal on the FY22F earnings estimate.

“It will catch up on production loss with extended shifts upon resuming operations. This is given that Power Root highlighted that it currently has existing inventories to cover a certain amount of production loss for a week. In addition, we believe Power Root can increase its production with extended shifts upon re-commencement of manufacturing activities,” CGS-CIMB Research said.

In line with that, the broker stated it will maintain its ‘Hold’ call on Power Root with an unchanged target price of RM1.61.

“Despite its soft near-term outlook, we believe the stock’s valuations will be supported by its relatively cheaper valuations versus other consumer staple stocks and its attractive dividend yields of 4.5% to 6.1%.”

“The upside risks include a sharp rise in export and local sales and better-than-expected cost control efforts while the downside risks include lower-than-expected domestic and export sales, as well as higher-than-expected rise in raw material prices,” CGS-CIMB Research noted.