digitaledge Weekly Power Root resilient to domestic market headwinds

by **Cals** Thu 20 Aug 2015, 20:32

digitaledge Weekly
Power Root resilient to domestic market headwinds

IT has not been an easy year for consumer goods companies as consumer sentiment has been weak. However, Power Root Bhd, which makes the popular Tongkat Ali and Kacip Fatimah beverages, stands out for its resilience and earnings growth.
One advantage that Power Root (fundamental: 2.80; valuation: 1.70) has in the current challenging business environment is the strength of its export segment. Success abroad has softened the impact of the weaker domestic consumer market.
“The [domestic] market is very competitive. Overall, consumer sentiment is weak [in Malaysia]. We felt the impact particularly in February and March. With the weak ringgit, the cost of raw materials, directly or indirectly denominated in US dollars, has increased. But the positive side is that receipts from export sales have helped cushion the impact,” says executive director See Thuan Po.
Currently, Power Root exports its products — energy drinks and instant coffee under the Ali Cafe, Per’l Cafe, Oligo Cafe and Ah Huat White Coffee brands — to 38 countries. The Middle East is its biggest customer.
In its financial year ended March 31, 2015 (FY2015), Power Root’s overseas revenue rose 32% year on year to RM127.7 million and made up 33.3% of its top line. Unsurprisingly, the Middle East contributed 70%.
“The Middle East is our oldest and most established market and we have been there since 2005. Our products are well received and we want to build on our strong presence in the MENA (Middle East and North Africa) region. Culturally, there are many similarities between Malaysia and the MENA countries. Our products are of good quality and go down well with customers there,” See says.
Power Root will finally roll out its long-talked-about plans to set up a manufacturing plant in the United Arab Emirates (UAE) to tap the region’s growth. “We want to be more competitive as the import taxes will be much lower if the products are produced there, and secondly, the time to market will be shorter,” See explains.
The ground work for the plant started in mid-July and total capital expenditure will come up to between US$14 million and US$15 million over the next two years, he points out. It will give the company an additional capacity of 80,000 cartons a month of instant coffee on top of the 150,000 cartons a month the existing Johor Baru plants are producing.
Power Root’s export revenue has recorded a compound annual growth rate of 43.9% from RM29.8 million in FY2011 to RM127.7 million in FY2015. So, growing the export business makes sense for Power Root in the longer term and having a new plant gives investors clarity about its export growth potential.
However, Malaysia remains the company’s largest revenue and profit contributor by geographic segmentation. Local revenue has been growing steadily in the last five years. In FY2015, the domestic market helped rake in RM255.6 million, or 66.7% of its total RM383.2 million revenue. This is a 21% improvement year on year.
Apart from its beverage manufacturing business, Power Root has ventured into property development. It purchased a three-acre parcel in Johor’s Pasir Gudang in August 2011 to develop 1st Avenue, which comprises 64 shoplots. The project has been completed and is fully sold.
For FY2015, the property development segment registered revenue of RM40 million and net profit of RM10.3 million. With that, Power Root declared a special dividend of 2.5 sen, bringing total dividends for FY2015 to 10 sen. This translates into a payout ratio of 70% or an attractive yield of 4.1%. Despite the success of 1st Avenue, Power Root has no plans to continue its property business.
As a consumer company, Power Root’s resilience has not gone unnoticed. Its share price has grown 60.78% year to date and reached a one-year intra-day high of RM2.44 on July 23. It closed at RM2.40 last Tuesday.
Analysts are enthusiastic about the stock. Kenanga Research analyst Soong Wei Siang says in a July 21 note that Power Root’s valuations are “attractive” for investors seeking exposure to the defensive and resilient F&B sector. He gave the company’s stock a fair value of RM2.58, based on 17.5 times FY2016 earnings, which is an approximate 30% discount to the price-earnings multiple of the large-cap F&B stocks it covers.
He writes, “We project earnings growth of 11.8% (calculated based on annualised FY2015 net profit) and 7.4% in FY2016 and FY2017 respectively, which is commendable for a consumer play, considering the current soft local consumer sentiment.
“In a nutshell, the stock should be viewed from the valuation and earnings rebound angles rather than just earnings growth alone, due to its mature earnings base,” he adds.
InsiderAsia, which chose Power Root as its stock of the day on July 16, says it is trading at “fairly reasonable valuations”. “We like the company for its long-term growth potential, capable management, strong fundamentals and decent dividends even if near-term earnings could be affected by weaker consumer sentiment.”

This article first appeared in digitaledge Weekly, on August 3 - 9, 2015.