Power Root - Powering Ahead

INVESTMENT MERIT

• Strong growth.  The group reported commendable 1QFY13 revenue and net profit of RM70.7m and RM7.8m respectively with YoY growth rates of 30.3% and 91.0% on an annualised basis. In fact, the profitability  of the group has improved steadily over the past 3 years with a CAGR of 18.7%.

• One of the major growth drivers is its export sales.  Management aims to grow the contribution from this segment to RM90m in FY13 (accounting for ~32% of the annualised revenue), or representing a growth of 94.8% from RM46m in FY12. 

• The group is also in the midst of launching a new product  i.e. Ah Huat White Coffee, a potential sales growth catalyst and future earrnings driver.  

• Transforming into a dividend stock? The group has been paying out >90% earnings as dividends in the past. We reckon that it can pay out at least 80% of its net profit, or a yield of 7.3%, in FY13, as the management has guided a manageable capex requirement of RM6.5m.

• Decent upside as well.  Based on our projected CY13 EPS of 8.4 sen (FY13: 8.2 sen; FY14: 9.4 sen) and the average next year PER of 12x, we value the stock at approximately RM1.00, implying a 11.1% upside from here.

SWOT ANALYSIS

• Strengths:  Strong local acceptance (25% local coffee market share) and growing overseas with export sales of 16.1% and 21.3% of group’s revenue in FY11 and FY12. 

• Weaknesses:  Volatile earnings track records before FY09 due to an overexpansion back then i.e. to

Indonesia coupled with rising raw materials cost. 

• Opportunities:  Could expand to untapped product segment i.e. white coffee and market segment i.e. SEA.

• Threats: Low barier of entry hence requiring constant A&P budget (15%-20% of revenue) and new product launches.

TECHNICALS

• Resistance: RM0.93 (R1), RM0.95 (R2), RM0.98 (R3)

• Support: RM0.82 (S1), RM0.77 (S2), RM0.75 (S3)

• Views: Bullish in the ST, MT and LT

• Comments: Trending strongly and tested the 138.2% FETL. However, tentative signs of bearish divergence emerging. Coupled with the overbought technical structure, we do not a technical correction from here before resuming its uptrend so long as the crucial support of RM0.815 remains intact.

BUSINESS OVERVIEW

• Power Root (formerly known as Natural Bio Resources) develops, manufacture and distribute various beverage products such as coffee, tea and herbal energy drinks fortified with two main rainforest herbs i.e. “Tongkat Ali” and “Kacip Fatimah”.

• Coffee, Energy drinks and Others account for 65%, 25% and 10% of its total sales respectively.

• The beverages under its brand include Ali Café, Per’l Café, Oligo Café, Power Root, Per’l and Ali Tea.

BUSINESS SEGMENT AND MARKET DEVELOPMENTS

• Through its subsidiaries, Power Root has successfully penetrated into 33 countries from the initial two (Brunei and UAE)  in 2006 with the view of replicating its success experienced in Malaysia.

• The top export destinations are Egypt, Arab Saudi and U.A.E., which have been accounting for 75% of its total exports.

• The group has also started its direct selling business division (Power Impian International S/B) in Indonesia at end of last year.

• Apart from that, the group has also incorporated a  wholly-owned subsidiary company, Power Root Distributor S/B in April 2011 to strengthen its distribution network around the Klang Valley.   

Source: Kenanga