Power Root is expected to experience margin expansion on lower input costs, said CGS-CIMB Research.
PETALING JAYA: Power Root Bhd
’s sales and net profit growth is expected to re-accelerate in the fourth quarter of financial year 2024 (4Q24) onwards premised on higher exports to the Middle East on restocking activities and higher sales contributions from Saudi Arabia as its new distributor ramps up sales initiatives.
The company will also undertake progressive price hikes across its Middle East markets (31.7% of first half of 2024 (1H24) until year 2025, CGS-CIMB Research noted in a report.
Power Root is also expected to experience margin expansion on lower input costs as it has locked in its raw material requirements (i.e. coffee and creamer) at favourable prices until September 2024, the research house noted.
Operationally Power Root is expected to enjoy higher economies of scale on higher utilisation rate (versus 50%-55%) in 1H24, it added.
CGS-CIMB Research also foresees a recovery in PowerRoot’s domestic sales, supported by the government’s expansionary policy with direct cash-handouts and potential civil servants’ upward salary revisions in 2024.
Over the past months, the fast moving consumer goods concern has been ramping up targeted influencer marketing campaigns on social media and outdoor advertising.
CGS-CIMB Research expects these marketing initiatives to help drive further brand awareness and bode well for future sales.
The overstocking issue by its distributors in East Malaysia and the Middle East however is set to persist into 3Q24 and only ease by end-December 2023 with restocking activities forecast to take place from January 2024 onwards.
CGS-CIMB Research said this should bode well with sales from 4Q24 onwards.
The research house has an “add’’ call on Power Root with a new target price of RM2.20 a share from RM2.80 a share earlier.
It said the revision reflects a 10% to 22% cut in FY24 to FY26 earnings per share, and a switch to Gordon Growth Model valuation to better capture Power Root’s medium-to-long term FY24 to FY26 profitability and growth trajectory.
CGS-CIMB Research likes Power Root for its strong brand equity in the instant coffee segment, undemanding valuations at 14.4 times 2025 price earnings ratio (P/E) and appealing yields of 5% to 6% (FY24 to FY26).
The company also has a strong net cash position of RM116mil as at end-September 2023. CGS-CIMB Research believes re-acceleration in sales and margin expansion are re-rating catalysts for the counter.
Downside risks cited are slowdown in sales and elevated input cost hurting margins.
