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Power Root riding post-pandemic recovery wave

Power Root riding post-pandemic recovery wave

16 Nov 2022

POWER Root Bhd appears to have caught the post-pandemic recovery wave, with earnings surging in its export markets while domestic sales continue to grow. This sales momentum is expected to be sustainable, Power Root executive director See Thuan Po tells The Edge in a recent interview.

As such, it should pave the way for the beverage manufacturer to surpass the RM400 million revenue mark for the current financial year — a goal that it has been trying to achieve for many years now.

Analysts covering the stock have estimated Power Root’s revenue for the financial year ending March 31, 2023 (FY2023), to come in between RM403.7 million and RM425 million, with net profit ranging from RM50.12 million to RM58 million. If the analysts are right, Power Root will be reporting its best-ever revenue and earnings since its listing in 2007.

While the economic recovery plays an important role in driving the group’s earnings growth, See says Power Root is also benefiting from the strengthening of the US dollar against the local currency. “Ninety per cent of our export sales are transacted in US dollars, except for [sales to] Singapore and Brunei.”

Notably, export sales traditionally make up more than half of the group’s revenue, with its main export market being the Middle East, in particular the Gulf Cooperation Council countries.

During the Covid-19 pandemic in 2020 and 2021, however, exports took a hit as borders closed and economic activities stalled.

See says the company’s export market in the Middle East had to contend with not only Covid-19, but also the imposition of higher Value Added Tax and a sugar tax. All three factors contributed to the decline in its export sales in the last few years.

The storm seems to have passed, however, and the group’s export sales are rebounding with a bang.

“The recovery for us started in 4QFY2022. It has continued in 1QFY2023 and the trend looks like it is continuing in 2QFY2023,” says See.

In August, the group announced a net profit of RM15.26 million for the first quarter ended June 30, 2022, against revenue of RM112.08 million. Both are substantially higher than the RM2 million net profit and RM74.68 million revenue it achieved a year ago.

Export sales for 1QFY2023 staged a 68% increase year on year, according to an RHB Research report. See says the group now expects export sales in FY2023 to reach 95% of its pre-pandemic levels.

Interestingly, as a manufacturer of beverages that uses coffee, non-dairy creamer and sugar as its main raw materials, the company has not suffered from skyrocketing commodity prices over the last few years.

“Yes, raw material costs have been escalating since 2021 and there were also problems of container shortages, but we managed to lock in our prices for our key material — coffee — until November 2022,” says See.

This meant that while other beverage manufacturers were increasing the prices of their products in early 2021, hit by escalating raw material costs, Power Root has managed to continue to hold its selling prices for a longer period of time, giving it an edge over its competitors.

“We were late in the game in terms of increasing product prices. We increased our product prices only when the cost became too steep to bear. Our first major price increase was on Jan 1, 2022, at an average of 8%, for the domestic market,” says See.

For some context on the escalation of raw material prices, See says the price of coffee has increased 80% while the price of non-dairy creamer (which is palm oil-based) has gained about 40%.

From November, Power Root will be paying 15% more for the coffee it purchases.

“The coffee we use [in our beverages] is blended. So, what we are doing, given that Brazilian coffee is so expensive currently, is to find substitutes — other coffee profiles that provide the same taste.

“Now, we are buying coffee from other places as well, including Vietnam,” says See, adding that consumers will not be able to notice the difference because the company’s research and development (R&D) has managed to produce a mix that gives about 95% taste profile similarity.

So, will Power Root increase the price of its products again soon? See says the next increase will take place in January next year at a quantum of 5%, but only for certain products.

It is said that a beverage manufacturer’s way forward is to keep innovating and introducing products to the market. The local beverage manufacturer, which is synonymous with its instant and canned beverages under brands such as Alicafé, Ah Huat and Oligo, is cognisant of that point and has been working on its own innovations. One of them — the “plain-vanilla brand” — has been introduced to the market under its Frenche Roast brand.

See says this brand caters for the younger generation, who are less receptive to the Alicafé brand, and those who prefer a more “Western” type of coffee. It is also meant to compete with widely popular brands, such as Nescafé’s premix or canned coffee.

Frenche Roast was launched at the least ideal time for any beverage manufacturer — during the Movement Control Order. Without footfall to supermarkets, it was close to impossible for the company to get its products to consumers.

Power Root was quick on its feet, however, and pushed out new product samples by tying up with other fast-moving products in hopes that the samples would reach households.

The strategy paid off, and See believes that not only is Frenche Roast here to stay but its addition also means Power Root will have its foot in almost all segments of the market.

RHB Research, in a recent report, says Frenche Roast has cemented a solid position in the mainstream market, and this success is attributed to product quality that is a result of Power Root’s R&D expertise.

The research house adds that the new brand is expected to contribute about RM20 million, or 5%, to the group’s total FY2023 sales.

Power Root is also looking to expand its premix tea offerings next year, but See remains tight-lipped on the details.

While many consumer product companies are worrying about how inflation will affect consumer spending, Power Root believes its products are resilient in the face of an economic slowdown.

See says: “If you talk about coffee, this is the most economical and affordable type. In an economic slowdown, people spend less on gourmet coffee and tend to downtrade.

“Coffee is inelastic because you need your fix. Our game is to make sure that we are still relevant to our customers. Other than price, there is always the ‘brand love’ from consumers.”

Power Root is confident that it will recover in FY2023. And with the expected revenue of more than RM400 million and higher net profit, shareholders will be rewarded for their investment in the company.

Consistent dividend payout of 80% to 90% of earnings

The group is generous in its annual dividend payout, having doled out a consistent 80% to 90% in the past, even though the dividend policy is 50%.

In FY2022, Power Root paid its shareholders a dividend per share (DPS) of 5.4 sen, totalling RM22.5 million, or a payout ratio of 86.3%. For 1QFY2023, it has proposed a DPS of three sen, higher than the 0.5 sen it paid a year ago.

Power Root’s share price has increased 53.85% since the beginning of the year. At Thursday’s close, it stood at RM2.06, giving the company a market capitalisation of RM847.9 million. There are currently three “buy” calls and one “hold” on the stock, with an average target price of RM2.31.

Source: The Edge Markets