POWER Root Bhd’s fundamentals are strong enough to anchor its earnings base and sustain dividend payout despite the transition to the new normal and soft market conditions making topline growth challenging, according to RHB Investment Bank.
“Topline growth should be challenging given the new normal transition and soft market conditions. That said, management will continue to optimise and rationalise costs to mitigate the impact,” said RHB analyst Soong Wei Siang.
Soong noted that Power Root’s management is currently cautious, due to the Covid-19 disruption to consumption and marketing strategy.
“Whilst we believe domestic demand for its instant beverages mix products will be resilient, new product launches were affected as product sampling is not allowed under the social distancing SOP. Apart from that, border closures have also dampened sales in tourist-driven channels,” said the analyst.
Soong noted that, with topline growth restricted by the unconducive environment and new normal transition, Power Root’s management will continue emphasising efficiency gains to mitigate the impact.
“The on-boarding of new management team members specialising in manufacturing processes has resulted in lower wastage, and hence, higher production yield.”
“We believe the cost optimisation run still has legs, and margins should continue to improve, supported by other ongoing operating cost rationalisation initiatives. Management is also taking a pragmatic approach on its marketing investment to correspond with topline softness,” said Soong.
The analyst opines that the challenging broader market environment will continue to affect most of the fast moving consumer goods (FMCG) players.
“As such, we believe Power Root’s solid fundamentals are still intact despite the pausing of earnings growth in FY21F. Management’s prudent and efficiency-hungry approach should cap earnings downside risks and sustain generous dividend payment.”
“We believe transparency in earnings guidance will prevent negative earnings surprises and potential stock selldown,” said Soong.
RHB maintains a buy call on Power Root, with a lower target price of RM2.71 from a previous RM2.80.
At 2.45pm, Power Root’s shares were last done at RM2.23, up 2 sen, with 551,100 shares traded, – Sep 7, 2020
