Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Thu, 2 Jul 2020, 9:50 AM


Spritzer Bhd - Staying Hydrated

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Near-term earnings are expected to be buoyed by resilient sales performances coupled with favourable raw material prices (i.e. PET resin), which should keep processing margins for its manufacturing segment fairly stable, at least for 1H19. Post-meeting, we reiterate our MP call with an unchanged TP of RM2.40 as we remain cautiously optimistic, concerned over the volatile PET resin prices which may be driven higher by unexpected turn of events.

Sustainable demand growth? In its recent 1Q19 results, the group chalked up a commendable 15% YoY sales growth, which was largely spurred by higher demand from the warmer weather and several water supply disruptions. Moving into 2Q, we gathered that the group managed to see relatively better numbers from its sales volume this recent fasting month. This prompted us to believe steady sales growth may be sustainable going forward, bolstered by the sturdy consumer sentiment seen in spite of the imposition of sales tax in Jan 2019, coupled with the group’s effective marketing strategies which have continued to capture local market share.

China operation to remain in the red. Despite the group’s effective cost rationalisation plans which helped to narrow losses in its trading segment (-RM0.5m in 1Q19 versus -RM0.8m in 1Q18), we believe a breakeven might take a longer timeframe than expected, which should see its China operation continues swimming in the red at least for FY19. This is pinning on the competitive operating environment in Guangzhou, which will continue to act as a constant challenge to the group unless more aggressive marketing measures are taken.

Chasing growth. Post-meeting, we understand that the group’s current capacity stands at 700m litres/annum (from previously 600m litres/annum) with its newly installed production line commencing in 2Q19. Further down the road, the group has in its pipeline plans to further enhance its Shah Alam drinking water plant entailing: (i) upgrading works for its reverse osmosis system, (ii) renovation of a small-scale fully-automated warehouse, and (iii) the addition of a new production line. With an estimated capex of RM60m, the enhancement should boost capacity by an additional 180m litres/annum, serving as a long-term positive catalyst. We have yet to incorporate this into our estimates due to the lack of clarity on the construction timeline.

Supported by favourable raw material prices. In the near-term, the group’s resilient sales performance is expected to be buoyed by softer prices seen for its raw material (i.e. PET resin), at least for 1H19, which should keep its manufacturing segment’s processing margins fairly stable. Furthermore, an expected commencement of its automated warehouse in Taiping by 1Q20 should also enhance the group’s cost efficiency in the longer-term. However, as mentioned, we believe the group’s trading segment in China will continue to act as a dampener, dragged by stiff competition and costly marketing expenses.

Reiterated MARKET PERFORM with an unchanged TP of RM2.40. Our TP is premised on an unchanged 16.0x FY20E PER (in-line with its 3-year average). Despite the group’s improved outlook following favourable PET resin prices, we deem our valuations to be fair at this juncture as we remain cautiously optimistic, concerned over the volatile PET resin prices which may be driven higher by unexpected turn of events. Risks to our call include: (i) poorer-than-expected sales, and (ii) higher-than-expected costs exposure.

Source: Kenanga Research - 12 Jun 2019

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