INVESTMENT MERIT
- A handsome
68.8%-gain. Including a 3.0 sen interim dividend which went ex in last
November, Power Root has delivered a handsome total return of 68.8% since our
first recommendation on the 14 August 2012 (Trading Buy @ RM0.90). In fact, the
share price has outperformed the benchmark FBMKLCI significantly as the latter
had ended almost unchanged over the same period of time (1,646.32 to 1,646.22).
- Flashing back
to our August 2012 report on Power Root, we believed that Power Root had gone
past the years of an unsuccessful venture in Indonesia, and was on track to
make a strong comeback in both topline growth and margin expansion. We liked
the company for its (i) export growth prospects, (ii) expansion track into new
markets, (iii) new product launches, which include the well received Ah Huat
label; and (iv) high scalability of its business in view of the burgeoning
demand in both the domestic and export markets.
- Strong growth
potential. Within this 7-month timeframe, Power Root had twice beaten our
earnings projections where the more recent quarterly results revealed that the
Group registered a 116.7% YoY surge in its 9M13 net profit to RM25.4m, which is
close to our previous FY13 full-year earnings projection of RM26.9m. Indeed,
this was due to an increase in the local and export sales apart from the
c.RM3.4m one-off gains on disposal of properties.
- Exports to drive
growth. The management has thus far been able to deliver strong numbers,
and we anticipate the Group’s export segment continue to spearhead revenue
growth going forward. We expect the Group’s export segment revenue to double in
FY13 to c.RM90m (from RM46.2m in FY12), followed by RM130m in FY14, underpinned
by higher demand from the markets of Middle East and Africa. Meanwhile, the
group also plans to set up a production facility in the UAE in late-FY14, which
we believe would be further support growth in the the afore-mentioned regions.
- Take profit! Power Root’s share price is now trading at
12.3x PER, which valuation appears slightly stretched in our view. There is
also an element of uncertainty ahead of the impending General Elections, and as
such, we feel that it may be time to take some chips off the table at this
level. That being said, we remain positive on Power Root’s longer-term
prospects, and may revisit the stock should the share price retreat to a more reasonable
level.
TECHNICALS
- Resistance:
RM1.54 (R1), RM1.62 (R2)
- Support: RM1.30
(S1), RM1.16 (S2)
- Comments: The
share price looks slightly strained, while RSI has also dipped downwards from
overbought levels. It is likely that we would see a small degree of profit
taking in the short term.
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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