MARC Ratings has assigned a preliminary rating of AA-_IS to Power Root Berhad’s proposed RM500.0 million Islamic Medium-Term Notes (IMTN) Programme. The rating outlook is stable.

The assigned rating is premised on Power Root’s established position in the instant beverage sector, supported by an extensive sales network, and its steady financial performance, characterised by sustained cash flow generation and a low leverage position. These strengths are moderated by the susceptibility of group performance to commodity price fluctuations and margin pressures from the stiff competition in the instant beverage market.

Established in 1999 as a manufacturer of instant beverages, Power Root has gained strong brand recognition that has translated into a healthy market position; in the instant coffee market, it had about 14% market share in 2023, the third largest in the country. Coffee-based drinks, including those under the Ali Café brand which is its most popular product line, account for the bulk of group revenue, standing at around 85% of total revenue over the past three fiscal years. Supplementing its coffee-based products are tea-based, energy and chocolate drinks. MARC Ratings views that Power Root’s constant expansion of its product range and frequent undertaking of advertising and promotional campaigns to target different demographics have been factors for its products, such as Per’l Kacip Fatimah, Ah Huat and Frenche Roast coffee, being well-recognised.

Power Root has been able to build a wide distributorship network that includes key retailers in Malaysia with whom it has relationships averaging 10 years. It has also steadily expanded its overseas distributorship, resulting in exports accounting for about 42% of the total revenue in fiscal 2024. Of this, the Middle East and North Africa region accounted for 69.5% while the remaining is from Southeast Asian countries. The rating agency notes positively Power Root’s diverse customer base — no single customer accounts for more than 15% of its annual revenue — that minimises client and geographical concentration risks. For its export operations, Power Root collaborates with local distributors in the respective countries to leverage on their knowledge and networks; it formed a 60:40 co-investment with Thailand-based Sappe Public Limited (Sappe) to distribute Frenche Roast coffee in that country and, in turn, Power Root distributes Sappe’s Mogu-Mogu coconut jelly in Malaysia.

The group operates two plants in Masai, Johor, with production capacities of 2.2 million cartons p.a. (premixed instant powder sachets) and 3.3 million cartons p.a. (ready-to-drink beverages). Utilisation rates have been within the 50%-75% range in recent years (including during the pandemic). For the financial year ended March 31, 2024 (FY2024), revenue was recorded at RM419.3 million as financial performance normalised from a post-pandemic high of RM455.8 million in FY2023. Going forward, revenue is expected to be boosted by the upward revision in product prices effective April 1, 2024, and July 1, 2024. MARC Ratings observes that the operating profit margin has broadly varied within the double-digit range in line with its peers owing largely to timing mismatches between product price revisions and commodity price increases. Cash flow from operations has been positive throughout the years, standing at RM44.7 million in FY2024.

Borrowings had been minimal prior to FY2022, reflecting conservative balance sheet management. Even as borrowings rose to fund capex, it stood at a modest RM59.3 million, translating into a debt-to-equity (DE) ratio of 0.17x as at end-FY2024. Share capital has steadily increased to RM319.6 million as at end-FY2024 from RM220.1 million as at end-FY2019, supported mainly by warrant exercises. In FY2024, new ordinary shares totalling RM58.4 million were generated from warrant exercises. Initial drawdown under the IMTN programme is expected to be about RM150.0 million, proceeds of which will be utilised mainly for working capital, machine purchases and facilities enhancement. Net borrowings are expected to increase by RM120 million, with DE ratio estimated to increase to around 0.50x. As at end-March 2024, the group had cash and bank balances of RM113.8 million.