Power Root's 1HFY25 results disappointed notably on higher-than-expected operating costs, particularly labour costs, although pressure somewhat eased QoQ. Its 1HFY25 net profit fell 38% due to rising labour costs and higher forex loss. Kenanga in its assessment said it expects local sales to remain relatively flat due to pricing adjustments, partly offset by the upcoming civil servant salary hike, while overseas markets continue to face challenges from geopolitical uncertainties. It also cut the FY25-26F net profit by 8-7%.

The house is fine-tuning its TP by 2% to RM1.30 (from RM1.28) based on forward valuation on year to FY26F (from calendarised CY25F) and reiterates MARKET PERFORM.

The 1HFY25 net profit of RM15.8m came in below expectations at only 42% and 37% of our full-year forecast and the full-year consensus estimate, respectively, though revenue was within expectations. The key variance against our forecast came largely from higher-than-expected operating expenses, particularly labour costs. It declared an interim dividend of 2.0 sen in 2QFY25 (consistent with 2QFY24), implying a dividend payout ratio of 109%.

YoY, its 1HFY25 turnover dropped 1% as weaker export sales (-13%) were partially offset by improved local sales (+7%). The house believes the increase in local sales could be partially attributed to the effective price hike for Alicafé products implemented a few quarters ago. However, its net profit plunged 38% due to rising labour costs (+15% YoY) and a forex loss of RM2.7m (1HFY24: RM2.1m gain).

QoQ, its 2QFY25 top line declined by 3% mainly due to lower sales in the overseas market (-17%). The weaker export performance was likely due to hefty sugar taxes in the UAE, KSA, and Oman, which doubled Alicafé prices and halved sales volumes. Local sales, however, provided some relief with a 6% growth. In spite of lower revenue, its bottom line grew 16% largely driven by reduced advertising and promotion costs, as well as lower variable labour expenses, leading to strong improvement in margins, particularly in the domestic market.

Kenanga expects local sales to remain flattish as PWROOT's pricing strategy adjustments narrows the discount of its products
against those of competitors. However, this may be partially offset by the upcoming salary increase for civil servants effective Dec 2024, which could help restore some consumer spending power. On the other hand, the house is still cautious on the overseas market which is expected to face persistent challenges due to geopolitical instabilities, impacting global retail demand and causing supply chain disruptions, especially in Middle East markets. Fluctuations in commodity prices and foreign exchange rates are likely to continue putting pressure on costs.

As for forecasts, the house is cutting its FY25-26F net profit by 8-7%, respectively, to account for higher labour costs. It also expects minimal impact from the upcoming increase in local sugar tax under Budget 2025, as 88% of the group's SKUs in Malaysia are already below the sugar tax threshold (as of FY24) due to ongoing product reformulation efforts