POWER ROOT BHD

By Kenanga Research Outperform (initiate) Target price: RM2.90 NOTING the potential of Power Root, driven by its growing export segment and expansion plans in the Middle East and North Africa (Mena) market, and the decent dividend yield of the stock, Kenanga Research initiated coverage on Power Root with an “outperform” call and a target price of RM2.90.

The brokerage said its target price for Power Root was based on a valuation of 17 times the latter’s 2018 estimated earnings.

It expected the counter to fetch dividend yields of more than 4%.

With the impressive organic sales growth generated by exports, Kenaga Research said it expected Power Root to continue seeing an expansion from the segment, spearheaded by the Mena market, which accounted for about 78% of export sales.

It based its argument on the region’s higher population base as well as higher standard of living that would boost a greater propensity for consumption.

In addition, the group’s leading market position in the Mena market would suggest that brand awareness was well rooted with consumers and hence, should experience sustainable demand.

According to Kenanga Research, despite the delay in the completion of Power Root’s new plant in the United Arab Emirates (from March 2017 to 2019), the prospects of the group in the region remained intact, thanks to its leading market position and resilient demand.

On the downside, though, Kenanga Research said Power Root could be strained by the higher commodity prices.

It said the normalisation of commodity prices (primarily coffee and sugar) would put pressure on Power Root’s profit margins in the short term due to the lack of hedging policies.

However, the group could benefit from stronger US dollar exchange rates given its sizeable exposure to exports, which accounted for about 40%-45% of the group’s total sales, and of which around 90% were transacted in US dollar.

Kenanga Research expects Power Root’s core earnings for financial year ending March 31, 2018 to grow 8% year-on-year to RM52.6mil, driven by higher export sales.

Dividend-wise, assuming a payout ratio of 70%, payments could be around 11 to 12 sen a share, which would translate into a 4.2% to 4.5% yield.