PWROOT (7237) - AH HUAT 888

POWER ROOT (7237)

POWER ROOT (M) SDN. BHD. was founded on 23 July 1999 in JB. It is a leading company to develop & promote herbal energy drinks fortified with 2 main rainforest herbs: Eurycoma longifolia Jack or commonly known as "Tongkat Ali" & Labisia Pumilia %&Pathoina or "Kacip Fatimah". These herbs are indigenous to Malaysia & its properties for promoting physical well-being are highly regarded by Malaysians.

With the determination to promote these local products in the international markets, Power Root has invested heavily in research and development of these traditional herbs to create its own brand of products. 

In March 2001, Power Root established a marketing branch in KL to better coordinate its logistic and serve its customers more effectively. 

In 2003, Power Root started its very own manufacturing plant in JB to cater for growing demands. An 18-acre phase 1 manufacturing facility is expected to be completed early 2008, incorporating modern production technology to cater for the strong market demand locally, business development opportunities abroad and new formulations development.

Power Root with its entrepreneur spirit, is committed to provide consumers with the ultimate choice of a high quality product. Concentrated efforts in research and development to develop new and improve existing products have also accelerated its success in the market. As such, the company was able to quickly establish a stable business foundation and thus, creates a very promising future for the company.

POWER ROOT also strongly emphasizes on product research and development, it has invested considerable amount of money in setting up its own R&D centre with the best facilities as well as training and sourcing of its human resources. 

With sheer innovation and determination, POWER ROOT's R&D team has developed more quality products under highly professional and clinical environment.

POWER ROOT believes that its employees are the greatest assets. As such, the company relentlessly provides ongoing training to enhance its employees' skills and knowledge as well as provides a conducive environment that allows its employees to achieve their greater potential. 

As the company recognizes that human capital is one of the key drivers towards future growth and financial performance, through its holding company POWER ROOT, an ESSOS was developed with the view of rewarding, motivating and incentivising its employees as well as allowing them to participate in the equity of the company.

In the span of the last few years, Power Root has established a strong and aggressive marketing network in Malaysia. These high quality products combined with aggressive promotional and marketing campaigns have made Power Root a leading brand in the Malaysia market. 

On the export front, Power Root has tie-ups with foreign distributors in the countries where its products are marketed. With its acute awareness of shifting lifestyle trend, the company will continuously improve and target the market with different products.

Power Root believes in long-term development and operates with the objective to produce high quality products that exceed customers' expectations, which will subsequently improve the quality of its customers’ lifestyle. Power Root plans to continuously expand its product in the international markets and ultimately, to make its brand "Power Root" a household name globally.

• Forex to accelerate export sales growth. Export sales, which contributed 39% of the Group’s total revenue (ex-property) in FY15, recorded impressive 4-year CAGR of 43.9% from RM29.8m in FY11 to RM127.7m in FY15. Currently, the Group exports its products to 38 countries with the Middle East region being the main market, which contributed 70% of the total export sales in FY15. Moving forward, the Group expects the robust export sales to be sustained on the back of the strong demand, particularly in the Middle East region. With the USD standing strong against MYR, so that the strong momentum in export sales bodes well for the Group.

• A&P normalization to spur instant growth. PWROOT has been allocating 15%- 20% of revenue as Advertising & Marketing expenses (A&P) during the past few years, which played a vital role in penetrating new markets or gaining market share in existing markets. The Group embarked on aggressive marketing campaigns in FY15, spending 22.2% of revenue or RM72.4m in order to strengthen its market position but the efforts have failed to bear significant fruits. Moving forward, management guided normalization of A&P expenses of 15%-20%, which estimate will shave off RM12m (21.3% of FY16E EBIT) from its expenses assuming a lower 17.5% or RM60.4m in marketing expenses in FY16.

• Longer-term excitement in planned UAE plant. PWROOT has planned to set up its manufacturing plant in Middle East once the sales milestone of RM130m is achieved. With export sales of RM127.7m recorded in FY15, so that the Group will proceed with the overseas expansion plan. The construction is projected to cost USD14m-15m in CAPEX, provides initial capacity of 80k cartons/month vs 150k cartons/month in existing plants in JB. It offers a longer-term prospect for investors looking beyond the near-term earnings growth driven by the factors mentioned above. Based on the Group’s 77% stake in the Middle East subsidiary, the expansion is expected to cost CAPEX of c.RM44m over a 2-year period.

• Sturdy balance sheet to sustain dividend pay-out. PWROOT is in a net cash position (net cash: RM54.2m or 17.9 sen/share as of 4Q15) and has been paying out 61.1%-73.5% of its net profit to reward its shareholders in the past three years. Even after taking into account the CAPEX requirements, FCF remains well above RM40m p.a. over the next 2 yrs & thus, the payout can be sustained. Expected payout ratio of 70% and dividend yields of 4.8%-5.0%.

The valuation is attractive for investors seeking exposure to the defensive & resilient F&B sector as it also represents a discount of c.30% from the large-cap F&B stocks.

· Resilient despite local headwinds. The project earnings growths of 11.8% (calculated based on annualized FY15 net profit) & 7.4% in FY16E & FY17E respectively, which is commendable for a consumer play considering the current soft local consumer sentiment. More importantly, PWROOT possesses the resilient & defensive nature of the F&B industry. In a nutshell, the stock should be viewed from the valuation and earnings rebound angles rather than on just earnings growth alone due to its matured earnings base.

Kenanga target price given RM 2.58

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