Power Root goes for competitive pricing

PETALING JAYA: Power Root Bhd has set its sights on expanding the market share of its coffee products and beverage offerings through competitive pricing.

The company’s resolve to refrain from further raising the prices of its coffee offerings in the near term, while its main competitors are expected to do so amid higher raw material costs, is expected to bode well for the company’s objective to gain a market advantage over others in the sector.

As it is, Power Root’s product prices are currently estimated to be about 10% lower than its main competitors in Malaysia, Kenanga Research said, citing the group’s management.

Following its recent engagement with Power Root’s management, the brokerage said earnings outlook remained positive, thanks to relatively more stable input costs for the company.

“It has locked in its coffee bean prices until December 2023, while creamer prices have gone down by at least 18% since November last year,” Kenanga Research wrote in its report.

“Sugar prices have risen at least 13% since November 2022, which Power Root had effectively responded with (previous) price hikes.

“The impact from the imminent sugar tax will likely to be muted as the sugar content in its stock-keeping units (SKUs) are generally below the stipulated threshold,” it added.

Reassured of the company’s prospects, Kenanga Research maintained its “outperform” call on Power Root, with an unchanged target price (TP) of RM2.70 a share.

The TP was based on 19 times the estimated price-earnings ratio (PER) for the financial year ending March 31, 2023, the brokerage said.

This represented a discount to the average historical forward PER of 22 times for the food and beverage sector to reflect Power Root’s less extensive product range as compared to its peers.

The counter closed RM2.13 last Friday, up two sen.

Power Root had undertaken three rounds of price hikes over the past one year, that is, in January 2022, October 2022 and January 2203.

Despite these price hikes, its sales volume had remained resilient.

“There was hardly any noticeable dent to Power Root’s sales volume despite three price hikes within slightly over a year. On the contrary, the price hikes have contributed to a 20% rise in total sales,” Kenanga Research pointed out.

“The only exception is SKU Ali Cafe which experienced a moderation in sales volume. Power Root has responded by cutting the price of the 15x20g pack by 60 sen, or 6%,” it added.

Kenanga Research noted that Power Root had more room to raise prices in the Gulf Cooperation Council (GCC) countries if it had to, as its products in these markets were currently about 20% to 25% cheaper than the market leader.

“The Middle East market is recovering to pre-Covid levels. GCC countries are back to 90% of pre-Covid sales, while non-GCC countries are hitting around 75%,” the brokerage said.

Power Root’s shipment to its largest export destination, Saudi Arabia, was expected to resume in May 2023, following a temporary pause due to a distribution problem since December 2022.

“Impact from the loss of sales (in Saudi Arabia) is very minimal since exports to Kuwait have doubled to close the gap,” Kenanga Research said.

Power Root’s key growth drivers for financial year 2024 (FY24) would be product diversification and growing product line.

“One of the key growth areas would be ready-to-drink (RTD) products with better margins. Its new RTD products plant is expected to be completed by 2024/2025. In the pipeline, are eight SKUs for Malaysia and five for the GCC countries.

“However, for Malaysia, it looks like only three will come on-stream in FY24,” Kenanga Research said.

Power Root’s net profit tripled to RM42.2mil for the nine months to December 2022 from RM13.6mil in the corresponding period of the preceding year, while revenue increased 38.4% to RM347.5mil from RM251.1mil.

Meanwhile, RHB Research had ascribed a “buy” call on Power Root, with a TP of RM2.60. CGS-CIMB Research advocated “add”, with a TP of RM2.68 a share for the company.

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