Set on an earnings upcycle; upgrade to Add
- Power Root’s 1QFY3/23 core net profit surged to RM14.3m (+642% yoy), beating our expectations and Bloomberg consensus FY23 estimate.
- We now expect the group to post strong bottomline growth of 91.3% yoy in FY23F, driven by higher economies of scale and product price hikes.
- We upgrade Power Root to Add on a robust 3-year EPS CAGR of 29.4% for FY22-25F with an attractive dividend yield of 5.8-6.3%.
1QFY3/23: Achieving its best quarterly core net profit in three years
Power Root Bhd’s (PWR) 1QFY3/23 revenue jumped 50.1% yoy to RM112.1m, mainly driven by robust export sales (+62.6% yoy) and domestic sales in Malaysia (+41.4% yoy). This is in tandem with the lifting of all Covid-19 business and travel restrictions as well as reopening of schools. Revenue from its Middle East market surged to RM36.9m (+88.0% yoy). 1QFY3/23 EBITDA margin expanded strongly to 17.3% (+10.8% pts yoy) owing to a more favourable product mix, higher economies of scale (plants running at full capacity), and progressive price hikes during the quarter for its Middle East markets, in our view. This
led to 1QFY23 core net profit leaping 7.5x to RM14.3m, which was above our expectations at 45.5% of our FY23 estimate and 37.6% of Bloomberg consensus. On 29 Aug 22, the group declared a first interim dividend of 2.0 sen/share and special interim dividend of 1.0 sen/share, totalling 3.0 sen/share (113% payout), above our expectation.
Price hikes and higher economies of scale to boost bottomline
We understand that PWR has on average hiked selling prices in Malaysia by c.8% YTD and c.5-12% for its Middle East market since 1 Apr 22, in line with its competitors, in order to offset elevated input costs. We are surprised by its ability to raise prices given the anticipated weaker consumer spending amidst high inflation. On the other hand, we expect strong volume growth from its domestic and Middle East markets in coming quarters. Also, its plants are currently running at full capacity (higher economies of scale) to fulfil upcoming orders secured. We do not discount the possibility of further selling price hikes in 2HCY22, which could boost margins.
Projecting a robust EPS CAGR of 29.4% for FY22-25F
We now expect PWR to post a robust FY22-25F EPS CAGR of 29.4% on the back of i) revenue CAGR of 9.0% for FY22-25F as sales demand recovered strongly post economic reopening, ii) robust margin expansion (EBITDA margin of 17.4-17.7% for FY22-25F vs. 12.6% on average over FY17-21) on a more favourable product mix, product price hikes and higher operational efficiency (higher economies of scale).
Upgrade to Add with a higher TP of RM2.40
We upgrade PWR to an Add from Hold as we see a robust earnings outlook, buoyed by a better product mix, higher economies of scale and improved operational efficiencies. As such, we raise our FY23-25F EPS by 24.1-56.8% to account for our higher revenue and margin assumptions. Accordingly, our TP is raised to RM2.40 (20x CY23F P/E, its 5-year historical mean). We like PWR for i) its appealing dividend yields of 5.8-6.3% (FY23-25F), ii) its healthy net cash position as at end-1QFY3/23 of RM72.7m (RM0.17/share), iii) current valuation of CY23F P/E of 15.7x, 21.5% discount to 5-year mean P/E of 20x, and iv) strong instant coffee market share in Malaysia and the Middle East.