KUALA LUMPUR (Aug 3): RHB Investment Bank Bhd (RHB Research) has maintained its ‘buy’ rating on Power Root Bhd at RM2.19 with a lower target price of RM2.80 (from RM2.96) and said its first quarter results of financial year 2021 (1QFY21) are likely to reflect topline softness.

RHB Research analyst Soong Wei Siang said the blip will not change the research house’s investment thesis on Power Root, as resilient demand and cost optimisation efforts should propel FY21F earnings growth of 6.4% year-on-year (y-o-y).

“Its attractive valuation presents a good opportunity for investors to accumulate this quality stock — with a resilient earnings profile, generous dividends, and efficiency-hungry management on offer,” he wrote in a note today.

He expects Power Root’s 1QFY21 sales to soften by 13%-18% y-o-y to RM77 million-RM82 million.

“Sales were dragged down by lower footfalls to shopping malls, on the back of social distancing protocols and consumer anxiety in response to the Covid-19 pandemic. This also affected distribution, particularly in April. The transition due to a change in distributors during 1QFY21 also had an impact. On a brighter note, we understand that the group has downscaled advertising & promotion spending accordingly.

“Hence, we expect 1QFY21 core net profit to come in above the RM10 million mark (versus 1QFY20’s RM12.8 million and 4QFY20’s RM14 million). We take the opportunity to trim FY21F net profit by 4% but keep FY22-FY23 earnings forecasts unchanged,” he said.

Moving forward, he believes consumption will remain robust, given the resilient nature of Power Root’s products and established brand, adding that the new normal of consumers spending more time at home could also spur demand for fast-moving consumer goods.

“However, new product launches could face challenges, as consumers will likely turn down product tastings. As such, we expect the company to tweak its marketing strategy and focus more on digital platforms. The cost optimisation initiative will continue, as management sees further room for improvement — and we expect this to drive margin expansion,” he noted.

Following a subdued year-to-date share price performance (-9%), the analyst said the stock is trading at 16.6 times 2020F price to earnings, just slightly above its five-year mean of 15 times. 

“This is a good opportunity for investors with a slightly longer investment horizon to accumulate the stock, in our view. We highlight that the stock offers a resilient earnings growth profile as well as decent dividend yield backed by a sturdy balance sheet, and we also like the efficient hungry management team,” he said. 

He also noted that the risks to the research house’s recommendation include a sharp rise in input costs and loss in market share. 

At 11.13am, Power Root shares were seven sen or 3.2% higher at RM2.26, bringing the market capitalisation of the group to RM947.85 million.