KUALA LUMPUR: CGS-CIMB Equities Research expected Power Root's sales in its second quarter ending Sept 30, to be weaker year-on-year due to the Covid-19 disruptions and subdued consumer sentiment.
In its research note issued on Friday, it said whilst Power Root has seen a gradual recovery in domestic sales post-MCO, export sales are likely to be subdued from weaker consumer demand.
“Reiterate Add, with a lower TP of RM2.65 (20 times CY21F P/E), ” it said.
To recap, Power Root posted a 32.2% yoy decline in domestic sales in 1QFY3/21 (ended June 30,2020), due to: i) weaker sales from stocking up activities in 4QFY20, which coincided with the start of the movement control order (MCO), and ii) lower sales of ready-to-drink products (15% of 1QFY21 sales), due to closure/limited operating hours of certain retailers, and lower footfall at other retail locations (convenience stores, petrol stations, etc).
“We gather that PWRT has seen a pick-up in demand from June onwards, in tandem with the reopening of more retail locations and higher consumer demand with the implementation of the recovery MCO (RMCO) on June 9, ” it said.
CGS-CIMB Research said while 1QFY21 export sales rose 12.2% yoy, this was due to a short-term spike in demand from stocking up activities in Saudi Arabia and UAE (~33.6% of 1QFY21 total revenue) before the value added tax (VAT) rate in both countries increased to 15% from 5% in July.
Coupled with the Covid-19 impact, this should result in short-term weakness in exports.
Power Root plans to mitigate this by launching a new product line priced at pre-sugar tax levels, but marketing activities have been disrupted by Covid-19 (lower footfall at key retail locations and lockdowns). Ongoing efforts to penetrate other Middle East and North Africa (MENA) markets (e.g. Egypt), should also be slow due to Covid-19.
“Despite our view of weaker near-term sales, we understand that PWRT will leverage on three strategies to drive its profitability: i) new product launches, ii) new markets, and iii) better operating efficiencies.
“To cater for a wider consumer crowd, Power Root plans to launch new products in various drinking formats and price points. Also, we gather that Power Root will continue efforts to penetrate new markets (non-MENA and MENA, e.g. Egypt) and improve its margins via enhanced operating efficiencies across its operations (from manufacturing to marketing), e.g. optimisation of manpower and reduction in wastages.
CGS-CIMB Research cut FY21-23F EPS to account for weaker sales and lowered its TP to RM2.65 (20 times CY21F P/E, +0.5 s.d. of its 10-year mean).
“Despite the muted near-term earnings outlook, we continue to like Power Root for: i) its established in-house brands to cater to the inelastic global demand for coffee, ii) attractive valuation at 16.9x CY21F P/E (a 37% discount to CGS-CIMB’s consumer staples sector target of 30 times), and iii) robust balance sheet (1QFY21 net cash: RM87.9m) to support its FY21-23F dividend yields of 5.5-5.7%, ” it said.