PETALING JAYA: Power Root Bhd has hedged its coffee supply until end-2022 to avoid steep fluctuations of its input cost, according to AmInvestment Bank Research.
The research unit pointed out that coffee is one of Power Root’s key input costs, accounting for 25% to 26% to its cost of goods sold (COGS).
Also, Power Root has increased the price of its products starting Jan 1 this year by 8% to 9% on average, following the steps of its competitors.
The company is targeting a profit after tax margin of 7% to 8% for financial year ending March 31, 2023 (FY23) which implies a 0.7 to 1.7 percentage point improvement compared to its recent third quarter ended Dec 31, 2021 (Q3 FY22) reported earnings.
Key takeaways from a recent virtual meeting with Power Root management include the company’s growth strategies for FY23 provide an additional boost to its bottom line, with its sales still below the pre-pandemic level.
Power Root plant in Johor Bau
“The focus of the strategies is widening its distribution network. According to Power Root’s estimate, there are 5,000 to 6,000 untapped potential new outlets or distributors in the domestic market which provide ample growth opportunities,” said AmInvestment Bank Research.
On top of that, Power Root is also planning to expand its product offerings in overseas markets such as Brunei.
Previously, overseas markets’ offerings were only limited to key volume products.
Domestically, Power Root is taking steps to upgrade its operational efficiency such as cutting down lead time by investing in a real-time inventory update system and improving its brand wellness in the marketplace by having a retail audit programme.
AmInvestment Bank Research also noted that there is a possibility that the government’s plan to impose excise duty on sugared premixed drinks will be put on hold, as details are still lacking.
“This bodes well for Power Root, although the company already has its new formula ready should the government decide to proceed with the excise tax plan. However, the reformularisation of its products could change the taste of its products and potentially affect demand,” said the research unit.
Key risks to Power Root include further increases in other raw materials prices such as creamer (25% of COGS) and sugar (21% of COGS), which may pose a downside risk to earnings.
An upside factor is a stronger-than-expected recovery of demand.
AmInvestment Bank Research maintained its “hold” call on Power Root with an unchanged fair value of RM1.21 per share, derived from 18 times the target price-earnings of FY23.
The research unit said the stock is fairly valued at the current level with its share price supported by its attractive dividend yield (4.9% for FY23) and robust balance sheet.