KUALA LUMPUR: Kenanga Research has maintained outperform on Power Root Bhd
with a lower target price of RM1.65 from RM2 as it revalues the stock as 15.0x price-earnings following the de-rating of small cap stocks.
The research firm said Power Root's focus in new markets may present opportunities to grow domestic contributions. It said management had mentioned resolving operational lapses, which may improve margins.
"Against soft consumer sentiment, management’s review of the existing domestic operating landscape also identified various room for improvements.
"This includes reducing production wastages, rationalising promotional expenditure and analysing non-performing sales arrangements," it said.
Kenanga Research also anticipates lower production costs in FY19 onwards following a laspe in unfavourable hedging positions during times when droughts resulted in a surge in global coffee prices.
According to the research firm, the focus on the domestic market is timely as export gains could be hampered by the recovery of the ringgit.
Reviews for operational improvement are also in the right direction as margin expansion could translate to further allowances to enhance sales strategies, it said.
"We maintain our earnings assumptions for FY18 in anticipation of a weak 4Q18 following the lack of seasonality factors. We also leave our FY19E numbers unchanged as we have accounted for lower forex and commodity prices during the year.
"Further, new ventures may not significantly impact the group in the short-term due to their gestation phases."
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