Power Root - Growing Strong

INVESTMENT MERIT

- Thus far, Power Root has gained 11.1% since our recommendation on 14/08/12 and recorded its highest gain of 24.4% when it reached a 52-week high at RM1.12 on 05/09/12.

- Brief comments on 1HFY13 results. The company recorded 1H13 revenue of RM133.3, which represented a commendable increase of 19.2% YoY. The group also doubled its net profit from RM8.3m in 1H12 to RM16.9m in 1H13, which was partly due to a c.RM2.1m one-off gain on the disposal of a property. Excluding this exceptional item, the net  profit still came in ahead of our FY13 full year projection of RM24.5m, underpinned by an increase in both local and export sales from the FMCG business.

- Fine-tuning earnings projections. As such, we have finetuned our FY13 net earnings projection from RM24.5m to RM26.9m, which is still slightly below its annualised core net profit of RM29.6m. Our conservative earnings projection is to reflect the potential higher marketing and promotion expenses in 2HFY13 in line with the launch of its new product – Ah Huat White Coffee. At the same time, we believe that this product will probably gain wider acceptance and hence make  a more meaningful contribution in FY14.

- Raising FV, Trading Buy call retained. In line with the slight upgrade in our net earnings projection, we have raised our CY13 EPS projection to 9.2 sen, and by maintaining the targeted PER of 12x, we are valuing the stock at approximately RM1.10, implying another 10.0% upside from here. Coupled with a potential dividend yield of >7%, we continue to recommend a Trading Buy.

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 in SEA.

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

TECHNICALS

- Resistance: RM1.08 (R1), RM1.12 (R2)

- Support: RM0.98 (S1), RM0.90 (S2)

- Comments: The share price appears to be stuck within the RM0.98-RM1.08 congestion zone. In the absence of any short term catalysts, the share price is likely to continue in range-bound mode for the immediate future. A breakout of either the R1 or the S1 will however force a review of the technical outlook.

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.

- Its top export destinations are Egypt, Arab Saudi and U.A.E., which account for 75% of its total exports.

- The group has also started its direct selling business division (Power Impian International S/B) in Indonesia at the 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