Power Root - Exports to drive growth

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 14^th  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