Power Root Bhd
(Nov 28, RM1.38)
Maintain outperform with an unchanged target price (TP) of RM1.90: First half of financial year 2019 (1HFY19) core net earnings of RM14.8 million is deemed broadly within our/consensus estimates, making up 44%/43% of respective full-year forecasts. We anticipate a stronger 2HFY19, backed by continuous rationalisation on the local front and a stabilising export environment.

 
A 1.7 sen interim dividend was declared for year-to-date (YTD) dividend of 3.4 sen. We also deem this to be within our expectations of full-year payout of eight sen.

Year-on-year (y-o-y), 1HFY19 sales of RM176.5 million declined by 18% mainly due to weaker domestic performance, which we believe could be due to the rationalisation of the group’s distribution network.

Export turnover also declined as market slowed on unfavourable economic developments.

Nonetheless, profit before tax expanded by 40% with better margins of 11.2% (+5.6 percentage points), thanks to more favourable input costs and operating efficiency from the recent rationalisation exercise.

Dragged down by higher effective taxes and certain adjustments to foreign exchange gains, 1HFY19 core profit after tax and minority interests (Patmi) closed at RM14.8 million (+6%).

Quarter-on-quarter (q-o-q), 2QFY19 revenue declined slightly by 2%, as better local sales (+14%) was negated by declining export results (-15%) from the above. Similarly, 2QFY19 core Patmi saw a 27% decline to RM6.2 million from higher tax exposure.

Following the rationalisation exercise, we believe the group is poised to experience stronger results backed by better hedged positions, and overall easing commodity trends. Further, recall that the group is in the midst of implementing further structural improvements to optimise operating expenses and minimising wastage.

In relation to the sugar tax, we believe the group will not be significantly impacted by its implementation given that canned beverages are expected to account for 30% of its local sales portfolio (or 15% of total group sales).

While it is likely that the group would pass down the tax to consumers, we do not believe the hike would be detrimental to overall demand, given the small quantum of the increase.

Post-results, we leave our FY19 estimates unchanged, although we tweaked our FY20 estimate (FY20E) earnings slightly by 0.3% following some housekeeping adjustments.

Our TP is based on an unchanged 18 times FY20E price-earnings ratio, in line with the stock’s -1 standard deviation over its three-year mean. Aside from its turnaround from an unfavourable operating environment, the stock also provides solid dividend yields of 5.8%/7.3% for FY19/FY20 respectively.

Risks to our call include lower-than-expected sales, higher-than-expected commodity and marketing costs, and lower-than-expected dividend payments. — Kenanga Research, Nov 28