POWER ROOT BHD

By Kenanga Research Outperform (maintained) Target price: RM1.65

KENANGA Research is positive on Power Root Bhd’s long-term outlook and has maintained its “outperform” call on the counter, following a meeting with the group’s new group managing director.

The research house said the group’s growth strategies to expand its domestic position was timely as its export gains could be hampered by the recovery of the ringgit.

“Further, reviews for operational improvements are at the right direction as margin expansion could translate to further allowances to enhance sales strategies,” it said.

However, Kenanga Research maintained its earnings assumptions for FY18 in anticipation of a weak fourth quarter following the lack of seasonality factors.

It also left its FY19 numbers unchanged to account for lower forex and commodity prices during the year.

The research house added that new ventures may not significantly impact the group in the short term due to their gestation phases.

“Against soft consumer sentiment, management’s review of the existing domestic operating landscape also identified various room for improvements.

“This includes reducing production wastages, rationalising promotional expenditure and analysing non-performing sales arrangements,” it noted.

While these measures were likely to bring better bottom line contributions to the group, the research house said the group may only generate results in the medium term following a period of implementation.

Kenanga Research said high average costs for key materials had led to the drag in profits during the past few quarters.

This, it said, was due to the unfavourable hedging positions during times when droughts instigated a surge in global coffee prices.

“We anticipate lower production costs to be factored in from FY19 onwards following the lapse of these positions, coupled with better domestic currency,” it said.