We came away from Spritzer’s analyst briefing feeling cautious over Spritzer’s near term outlook, as we think that the group’s profit margins may be affected by the rising operating cost and strengthening of the USD. In addition, we believe Spritzer’s China operations would remain a drag, given the high logistic cost. Nevertheless, we foresee Spritzer to continue to benefit from the recovery in economic activities, which should translate to greater bottled water sales. This should result in greater economies of scale, which should help to mitigate the impact from the rising operating cost. All in all, our Neutral call and TP of RM1.67 on Spritzer is re affirmed, based on 13x PER FY24F EPS.

• 1HFY23 results recap. For 1HFY23, Spritzer saw its topline grew by 13.7% YoY to RM233m, mainly attributable to the increase in bottled mineral water sales following the recovery in economic activities. This is further supported by the adjustment in ASP. Note that the group adjusted c.5-10% of its ASP throughout FY22. In tandem with the stronger sales, Spritzer’s net profit increased by 35.3% YoY, mainly lifted by greater production efficiency and a favourable product mix. The group is currently operating at c.70% utilization rate.

• Expecting sales growth to continue. Going in 2HFY23, we expect Spritzer to post stronger revenue growth, benefitting from the recovery in economic and tourism activities. Furthermore, we understand that Spritzer is looking to grow its presence in Singapore, a market that was under-penetrated previously given the high logistical cost to ship from Taiping. We believe that the new production line and warehouse in Yong Peng should reduce logistic cost to Singapore, thereby enabling Spritzer to focus more on the Singaporean market.

• Elevated cost may squeeze margins. Although Spritzer may benefit from the recovery in economic activities, we remain wary over its profit margins, mainly due to higher electricity and labour cost. While PET resin prices have declined by c.28% from its peak in CY2022, we think that the impact on cost savings may be muted as PET resin prices are usually quoted in USD. In addition, we expect Spritzer’s operations in China to remain loss making, dragged by the intensive competition from the local brands and high logistical cost.

• Capacity expansion plans. For FY23, Spritzer had earmarked c.RM54m as capital expenditure to build new bottling line (RM16m each) and warehouses in Shah Alam and Yong Peng. Spritzer is looking to increase its existing capacity of 1bn litres per annum to 1.2bn litres per annum by building 2 new lines in Taiping and Yong Peng respectively. The new lines are expected to start commissioning by 1QFY24.

Source: PublicInvest Research - 5 Sept 2023