KUALA LUMPUR (Dec 13): CGS-CIMB maintained its “add” call on Power Root Bhd at RM1.78, as it expects Power Root sales and net profit growth to reaccelerate given its export sales growth, new product launches, and brand-building exercises.

The research house, however, lowered its target price (TP) to RM2.20 (from RM2.80) to reflect:

1) a 10%-22% cut in FY2024-2026F earnings per share (EPS), and
2) a switch to Gordon Growth Model (GGM) valuation (21.4% FY2026F return on equity (ROE), 8.7% cost of equity capital (COE) and 4% long-term growth) to better capture Power Root's  medium- to long term FY2024-2026F profitability and growth trajectory.

In  a note on Wednesday, CGS-CIMB stated that one of the key drivers of its optimistic view on Power Root is attributed to the increased export sales to the Middle East and higher sales contributions from Saudi Arabia, as its new distributor ramps up sales initiatives.

It noted that the progressive price hikes across its Middle East markets until the forecast year of 2025 (2025F) and higher economies of scale on higher utilisation rates are also the reasons expected to drive its sales and net profit growth. 

Margin expansion on lower input costs is also the key driver. It added that Power Root has locked-in its raw material requirements, like coffee and creamer, at favourable prices until September 2024F. 

Meanwhile, it expects to see a recovery in Power Root’s domestic sales, supported by the government’s expansionary policy with direct cash handouts and potential civil servants’ upward salary revisions in 2024F.

Citing the management of Power Root, CGS-CIMB stated that the premium Frenche Roast product domestic sales grew 26% year-on-year (y-o-y) in 1HFY2023/24, accounting for approximately 9% of sales compared to 5% in 2023. 

It added that Ah Huat product sales also grew y-o-y, driven by its ongoing promotional and marketing campaigns. 

“We believe this underscores the effectiveness of its ongoing brand-building initiatives (i.e. targeted influencer and contest marketing campaigns), which could further help drive its sales momentum from 4QFY2024F onwards. 

“Management also shared that it observed solid demand for its new Jom Teh brand (its new product launched in September 2023 to penetrate the 30 sachets 3-in-1 premix tea segment) and is on track to achieve its target of RM3 million to RM5 million sales in FY2024F.

“We believe this is a sign of its R&D (research & development) strength.  In addition, management also said that it would be enhancing its product packaging designs for its energy drink and Oligo brands in 2HFY2024F/FY2025F, making its products more competitive,” said CGS-CIMB.

CGS-CIMB reiterated its “add” call on Power Root, as it continued to like Power Root for its strong brand equity in the instant coffee segment, strong net cash flow, as well as appealing yields. 

At the time of writing, Power Root was traded two sen or 1.14% higher at RM1.78, translating into a market capitalisation of RM 864.98 million.