As producers of staple products, Power Root will be a potential beneficiary of improved consumer spending.
KUALA LUMPUR: AmInvestment Bank Research has initiated coverage on Power Root with a buy recommendation and a fair value of RM2.20.
It said on Friday this was based on 15 times CY19F price-to-earnings (P/E), representing a 57% upside. It is pegged to its historical average P/E. An estimated dividend yield of 6.4%-8.7% is attractive as well.
The research house said FY18 appears to be a blip year with externalities impacting earnings compounded by a corporate reshuffle, which has been unfairly perceived, in its opinion.
The fundamentals for Power Root are firmly intact, if not improving. According to the company's website, it produces herbal energy drinks fortified with two main rainforest herbs: Eurycoma longifolia Jack or commonly known as "Tongkat Ali" and Labisia Pumilia and Pathoina or "Kacip Fatimah".
These herbs are indigenous to Malaysia and its properties for promoting physical well-being are highly regarded by Malaysians.
AmInvest Research said amongst the catalysts ahead are the Middle East and North Africa region, which now accounts for 40% of revenue to spearhead growth as penetration levels remain unsaturated amidst a large captive market.
It has consistently grown at an estimated compounded annual growth rate (CAGR) of 25% over the past three years (FY15-FY18F).
AmInvest Research said Power Root was also realising its past sacrifices.
The previous commercial strategy was focused on market share accretion, which Power Root has successfully achieved over the years by ploughing into advertising and promotion (A&P).
“Management envisions Power Root to transition into realising past commercial investment sacrifices, which we think will benefit the bottom line.
“It is well within reach as A&P is elevated at 22% of revenue against fast moving consumer goods (FMCG) companies’ typical range of 10-15%.
“There has been some negative perceived uncertainty over Power Root in the last six months, which untimely coincided with its soft earnings patch. The fundamentals for Power Root are firmly intact, if not improving,” said the research house.
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