Investment Highlights

• We initiate coverage on Spritzer with a BUY call and fair value (FV) of RM2.40/share, which offers a total potential return of 23% (20% potential capital gain and 3% dividend yield). Our FV is derived from a target FY23F PE of 15x (+0.5SD of the stock’s 5-year mean). There is no ESG-related adjustment to the FV based on our 3-star rating.

• Leveraging on its strong branding, Spritzer managed to continuously grow its revenue base over the past decade. To date, the company commands a significant 40% market share of bottled water products in Malaysia. The group has a presence across multiple price points for mineral/drinking water to capture a sizeable share of growing domestic demand, backed by increasing consumer health awareness.

• The group’s production is also supported by a highly automated facility located in Taiping, Perak. To address growing demand and further enhance its processes, Spritzer plans to install a new production line (increasing capacity by 17% to 1,000mil litres/annum by 1QCY22) and a water treatment plant with a total estimated capital expenditure (capex) of RM25mil-30mil.

• Spritzer’s FY23F earnings are expected to be bolstered by easing crude oil price. Packaging cost makes up 70% of the group’s production cost, predominantly attributed to polyethylene terephthalate (PET) which is used to manufacture water bottles. Our FY23F gross margin forecast of 41% (based on Brent crude oil price of US$80- 90/barrel projection) implies a 1%-point improvement vs. 2022 Brent crude oil price average of US$100-105/barrel.

• Driven by the normalisation of input cost and growing demand for a healthier beverage option, we are forecasting a compelling 3-year net profit CAGR of 16% to RM38mil in 2024F. This is on the back of a steady 3-year FY22-FY24F CAGR revenue of 10%.

• Underpinned by its ability to generate healthy operating cash flows and a sturdy net cash balance of RM16mil as at 31 December 2022 (FY22F: RM34mil), we are projecting Spritzer’s dividend payout of 5 sen/share (37% payout) in FY22F and 6 sen/share (38%) in FY23F.

• Spritzer is currently trading at an attractive ex-cash FY23F PE of 11.9x vs the KL Consumer Product Index’s forward PE of 19x and its closest competitors ie. Fraser & Neave Holdings (19x), Dutch Lady Milk Industries (22.5x) and Power Root (16.7x). We believe this is unjustified given its position as a market leader within the growing mineral/drinking water industry. Easing input cost is also expected to bolster the company’s earnings growth in FY23F.

Source: AmInvest Research - 26 Sept 2022