AmInvestment: Power Root Hedges Coffee Supply to Avoid Cost Fluctuations

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KUALA LUMPUR (March 22): AmInvestment Bank Bhd maintained its “hold” call on Power Root Bhd with an unchanged fair value of RM1.21 as it made no changes to its profit forecast for the group, according to its analyst Muhammad Afif Zulkaply.

In a Tuesday, March 22 note, Afif shared that with sales still below pre-pandemic levels, Power Root is implementing several growth strategies to give its bottom line an additional boost.

He said the group intends to focus on strategies to expand its distribution network.

“According to the company’s estimate, there are 5,000 to 6,000 new untapped potential outlets/distributors in the domestic market, which provide ample opportunities for growth.

“In addition to this, the company also plans to expand its product offerings in overseas markets such as Brunei. Previously, overseas market offerings were limited to key volume products only.

“At the national level, Power Root is taking steps to improve its operational efficiency, including reducing lead times by investing in a real-time inventory update system and improving the well-being of its brand in the market through a retail audit program,” he said.

Afif added that the group has also hedged its coffee supply until the end of this year to avoid sharp fluctuations in the cost of its inputs.

The research house estimates that coffee is one of Power Root’s biggest entry costs, accounting for 25% to 26% of its cost of goods sold.

“Power Root increased the price of its product from January 1, by an average of 8-9%, following in the footsteps of its competitors,” he explained.

Meanwhile, regarding the implementation of excise duties, it is possible that the plan to impose excise duty on sugary pre-mixed beverages will be put on hold, which bodes well for the company.

“The company already has its new formula ready should the government decide to go ahead with the excise tax plan. However, the reformularization of its products could change the taste of its products and potentially affect demand.

“Recall that the excise duty was to be put in place from April 1, 2022 when the 2022 budget was tabled,” he said.

Afif also said the main potential risks for the group include a further increase in the prices of other raw materials such as cream and sugar.

As of this writing on Tuesday, Power Root shares were unchanged at RM1.34, giving it a market capitalization of RM575.50 million.

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