Is Power Root Berhad (PWROOT) a Contrarian Buy After a 27% 5-Year Loss?

In the ever-shifting landscape of Malaysian equities, Power Root Berhad (PWROOT) has become a case study in investor skepticism. Over five years, its stock price has slumped 34% from a peak of RM2.07 in 2022 to RM1.35 in mid-2025—a decline often cited as evidence of a structurally weakening business. Yet beneath the surface, the fundamentals tell a more nuanced story. This article examines whether PWROOT's stumble presents a contrarian opportunity, weighing undervaluation, dividend resilience, and the path to an EPS turnaround.

Valuation: A Discounted Beverage Play?

PWROOT's current market cap of RM555.4 million places it at a 27% total shareholder return (TSR) loss over five years—a metric that blends both price declines and dividends. While the stock's price-to-earnings (P/E) ratio of 18.45 appears elevated compared to historical lows, it is reasonable if earnings stabilize.

The company's price-to-book (P/B) ratio of 1.2, however, suggests it trades at a slight premium to its tangible assets. This may reflect residual goodwill in its brand or distribution networks. Analysts project a 6.5% annual revenue growth through 2028, modest but in line with Malaysia's beverage sector. If PWROOT can narrow its valuation gap with peers (average P/E of -15-20), it could offer asymmetric upside.

Dividend Resilience: A Silver Lining?

PWROOT's dividend yield of 5.0%—combined with a buyback yield of 9.7%—creates a total shareholder yield of 14.6%, outpacing the beverage sector's average of 4.1%. Yet caution is warranted: the cash payout ratio has crept to 101.9%, suggesting dividends are not fully covered by operating cash flow.

The dividend per share (DPS) has been cut twice since 2023, from RM0.035 to RM0.013 in mid-2025. While this reflects earnings volatility, the payout ratio of 90% (relative to net income) remains sustainable—if EPS stabilizes. Analysts forecast a 29.8% EPS rebound in the next year, which could lower the payout ratio to 66%, easing cash flow pressures. For income-focused investors, the yield may offset near-term volatility, provided management prioritizes cash preservation.

EPS: The Turnaround's Litmus Test

PWROOT's earnings per share (EPS) have been a rollercoaster. After hitting RM0.142 in 2023—a 130% jump from 2022—EPS plummeted 23% year-on-year in 2025 to RM0.072. This decline, driven by a shrinking net margin (7.6% in 2025 vs. 9.8% in 2024), underscores operational challenges.

Critically, revenue has stagnated near RM420 million since 2023, while costs have risen. A turnaround hinges on two factors: (1) restoring margins through cost discipline and (2) capturing share in a beverage market growing at 13.2% annually. PWROOT's 1.4% EPS growth since 2020 lags behind sector peers, but if it can align with industry trends, valuation multiples could expand. Historically, positive EPS updates have driven stock performance: backtests show a 2.5% average gain over 20 days following earnings announcements since 2020, reinforcing the importance of this metric.

Backtest the performance of Power Root Berhad (PWROOT) when 'buy condition' is triggered 5 days before quarterly earnings announcements and held for 20 trading days after results, from 2020 to 2025.

Sector Dynamics: A Headwind or Tailwind?

Malaysia's beverage sector, fueled by urbanization and rising disposable incomes, is a growth engine. PWROOT's 6.5% revenue growth forecast trails the sector's 13.2% average—a gap that must narrow. The company faces stiff competition from giants like Nestlé and local brands leveraging digital marketing.

PWROOT's reliance on traditional distribution channels and limited innovation in its product portfolio (e.g., carbonated drinks) may hamper growth. A strategic pivot toward healthier beverages or e-commerce could help, but execution is key.

Risks: The Elephant in the Room

• Margin Erosion: Input costs for ingredients and logistics remain volatile, squeezing profitability.
• Dividend Sustainability: A cash payout ratio above 100% risks dividend cuts if EPS remains depressed.
• Sector Overcapacity: Competitors' aggressive pricing could limit PWROOT's pricing power.
• Governance Concerns: A shareholder dilution warning in 2023 raises questions about capital allocation.

Conclusion: A Wait-and-See Contrarian Play

PWROOT's 27% TSR loss over five years reflects both fundamentals and sentiment. While its undervaluation relative to sector peers is tempting, the path to recovery demands operational discipline and strategic agility.

Investors should consider a partial position if the stock dips below RM1.25—a level that offers a 20% margin of safety. Key catalysts include:
1. A sustained EPS rebound to RM0.09+ by 2026.
2. A dividend payout ratio below 80% to ease cash flow strain.
3. Evidence of market share gains in high-growth beverage segments.

Until then, PWROOT remains a high-risk, high-reward bet—best suited for investors willing to bet on a turnaround rather than a stable income stream.

Final recommendation: Hold for now. Monitor Q3 2025 results for EPS stability and any strategic shifts.