Power Root Bhd (Power Root) reported a challenging start to FY25, with its 1QFY25 earnings falling short of expectations. The company's net profit of RM7.3 million was 52% lower compared to the previous year and missed both internal and consensus forecasts, coming in at 13% and 14% of full-year estimates respectively. This disappointing performance was primarily driven by a significant increase in operating costs and lower sales from overseas markets.

Analysts have reacted to the company's performance with a cautious outlook. Kenanga Stock Broking House maintains an UNDERPERFORM call and has reduced the target price (TP) to RM1.28 from RM1.40, reflecting a 9% decrease. This adjustment aligns with a forecast cut for FY25-26F net profits by 12-6%. The reduced TP takes into account the company's higher-than-expected operating costs and the weaker overseas market performance.

Power Root's revenue in 1QFY25 saw a decline of 6% year-on-year, largely due to a 13% drop in overseas sales, particularly in the Middle East. This drop was exacerbated by significant increases in product prices due to sugar taxes, which led to reduced sales volumes. However, local market sales provided some relief with a modest 0.5% increase. Despite this, the company's EBIT fell sharply by 52%, driven by rising staff costs and higher advertising and promotion expenses, leading to a contraction in profit margins from 16.5% to 8.5%.

On a quarter-on-quarter basis, turnover decreased by 7%, with declines in both overseas and local markets. The weak performance in international markets, compounded by high foreign exchange losses and pricing adjustments domestically, further strained profitability.

Looking ahead, the outlook for Power Root is mixed. While domestic revenue shows some promise, buoyed by anticipated salary increases for civil servants and improved economic conditions, challenges remain. The company is expected to face ongoing issues from geopolitical instabilities and fluctuations in commodity prices and foreign exchange rates.