INVESTMENT MERIT
- Stellar share price
performance. At yesterday’s closing price of RM1.23, Power Root has gained
40.0% (including 3.0 sen dividend) since our ‘Trading Buy’ recommendation dated
14th of Aug 2012. In fact,
the share price has also outperformed the benchmark FBMKLCI by a strong 41.5ppt
as the latter lost 1.5% (1,646.32 to 1,620.93) over the same period.
- Results review.
During the 6-month time frame, Power Root has twice beaten our earnings
projections. Recently, the group recorded a 116.7% YoY surge in its 9M13 net profit (from RM11.7m in 9M12 to RM25.4m in 9M13).
This was due to: 1) an increase in the local and export sales of the group’s
FMCG business and 2) A c.RM3.4m (RM2.1m in 2Q13 and RM1.3m in 3Q13)
one-off gain on the disposal of
properties. Excluding the exceptional gain, the net profit still came in ahead
of our revised FY13 full-year earnings projection of RM26.9m.
- Exports to drive
growth! Power Root’s export sales
have been particularly impressive. The group’s export sales have grown from
just RM1.7m in FY06 to RM65.2m in 9M13 with the
Middle East and African regions making up most of the exports revenue
(about 87% ). As we look toward FY14, management aims to grow the
full-year contribution from this segment to RM130m. We also expect a
significant scope for further growth here and in other countries as well going
forward.
- Raising earnings projections. We are raising our FY13-FY14
projections from RM26.9m-RM31.1m to RM32.9m-RM36.5m. We are also maintaining our
targeted 12.0x PER valuation on the stock. Based on a revised CY13 PER of
12.0x, we value the stock at RM1.44. The new target price implies a still
decent upside of 17.0% and as such, we continue to recommend a Trading Buy call
on the stock.
SWOT ANALYSIS
- Strengths: Strong foothold in Malaysia, with 18-24% in
Coffee and 29-33% in Energy drink market shares. Market leader in the UAE
coffee premix market.
- Weaknesses:
Increasing contribution from exports could cause a seasonality effect on the
group’s revenue.
- Opportunities:
Could set up a production facility in the UAE to support growth and reduce
delivery lead time in the Middle East and African regions.
- Threats: Low barier of entry requires constant A&P
budget (15%-20% of revenue)/ new product launches.
TECHNICALS
- Resistance: RM1.28 (R1), RM1.36 (R2)
- Support: RM1.15 (S1), RM1.00 (S2)
- Comments: Power Root’s technical picture remains bullish despite
its low trading volume of late. The share price has found solid support at RM1.
15 – a level where strong buying interest would likely exist.
BUSINESS OVERVIEW
- Power Root 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, Chocolate and Tea account for 77%,
12%, 5% and 5% of its total sales respectively (9MFY13) under the brand names of
Ali Café, Per’l Café, Oligo Café, Power Root, Per’l Ali Tea and the Ah Huat
White Coffee.
BUSINESS SEGMENT
AND MARKET DEVELOPMENTS
- Through its subsidiaries, Power Root has successfully
penetrated into 35 countries from the initial two (Brunei and UAE) in 2006 as it forges ahead in replicating its
success experienced in Malaysia.
- The revenue contribution from overseas markets have grown
to 32% of its total revenue, with new markets being developed such as
Philippines, Algeria, Maldives, Somalia and Australia in 9MFY13. Plans are also
underway to expand into Singapore and Hong Kong.
- Its top export destinations are the Middle East and
Africa, which account for 87% of its total exports by revenue.
Source: Kenanga
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