KUALA LUMPUR: CGS-CIMB Research is positive on Power Root Bhd's near term outlook given price hikes on January 22 and pent-up demand, which should bode well for the company's second half of the financial year 2022 (FY22).

The research house said Power Root had raised average selling prices (ASP) by 9-10 per cent for its products in Malaysia and five per cent for other regions.

"We believe this could partially offset the rising raw material prices such as coffee, sugar and creamer, and logistics costs, which we estimate could lift the cost of goods sold (COGS) by 10-15 per cent.

"Additionally, we gather that the company has locked in coffee prices at a favourable rate until October 22, which should help to alleviate some cost pressure," it said.

CGS-CIMB Research said the reformularisation of Power Root pre-mixed beverages to lower the sugar content following the sugar tax effective April 1, 22 may pose a demand risk.

In response to the excise duty, Power Root has reformulated up to 95 per cent of its pre-mixed beverages to lower the sugar content to pre-tax levels instead of raising prices, which the company will roll out on March 22.

"However, we expect the slight change in taste to put demand at risk, particularly after the front-loading of purchases.

"Therefore, we cut our earnings forecasts for FY23-24 by 14-17 per cent," it said.

The research house has reiterated a Hold call on Power Root with a higher target price of RM1.40 as it rolls over to the calendar year 2023 forecasts.

"We believe that solid dividend yields will support valuations, strong balance sheet (net cash of RM94.0 million as at the end of Q2 FY22) and strong instant coffee market share in the domestic and Middle East markets," it added.