PETALING JAYA: Power Root Bhd is on a recovery path as the current lockdown is expected to be shorter than the first one in March last year.
The beverage group is expected to see improvement in its revenue stream this year.
According to Kenanga Research, Power Root’s top line challenges are gradually receding.
“We view that domestic top line could top RM175mil to RM180mil (in line with current assumption) premised on returning to its core products such as AliCafe, the introduction of three new products and efficiency in dealerships, ” it noted.
Kenanga Research, in its latest report, expected RM160mil in top line from the export market, with the Middle East and North Africa contributing 63%, which is an increase from RM144mil in financial year 2021 (FY21).
This is premised on aggressive expansion into China, Singapore and Brunei, and new overseas distributors with emphasis on direct distribution.
However, based on a recent meeting with Power Root’s management, Kenanga Research has slashed the group’s earnings estimates and downgraded the stock to “market perform” with a lower target price of RM1.45 from RM1.90 previously.
While the worst is over for its top line, volatile raw materials costs may undermine margins.
FY21 margins continued to be challenging with cost of goods sold at 48% (FY20: 46%) underpinned by sugar (making up 25% of raw materials costs) coupled with rising prices for packaging (15% of raw materials).
The research house is cautiously optimistic for easing of sugar prices by end of calendar year 2021 (CY21) on cooling demand, better weather and favourable ringgit but maintained a conservative view of margins to remain at these levels at least for FY22.
“We believe Power Root has been unable to pass the rising cost to consumers as the big players are keeping their selling prices low (slashing 30%-35%) due to their high inventory and understand that these excess inventories are expected to be cleared by Q4CY21 which will see the selling prices returning to normal with the company expecting to pass the rising costs to consumers.
“On a positive note, we find coffee and creamer (60% of raw materials) are already hedged into June 2022, which should support its FY22 estimate margins similar to FY21.