Investment Highlights

• We maintain our BUY call on Spritzer with a lower fair value of RM2.71/share (from RM2.90/share previously) due to lower earnings forecasts with a rolled forward FY24F PE of 14x, at parity to its 7-year mean. We have a neutral ESG rating of 3 stars for Spritzer.

• 1QFY23 results missed our and consensus expectations at only 18% of our previous full year forecast. The negative variance was due to higher-than-expected operating expenses impacted by an increase in electricity costs.

• Hence, we cut our FY23F-FY25F earnings by 12%-15% after raising cost assumptions to reflect heightened electricity prices. However, we maintained FY23F–FY25F revenues as 1QFY23 revenue was in line with expectations, accounting for 24% of both our and street’s estimates.

• YoY, 1QFY23 core earnings of RM7mil rose 8% on the back of an 11% revenue growth, buoyed by higher sales of bottled water and related products (+12% YoY). This is mainly attributed to increased sales volume and average selling prices. However, sales of plastic packaging materials dropped by 8% YoY on lower volume.

• QoQ, 1QFY23 core bottomline decreased by 20% despite topline nudging up marginally by 1%, mainly affected by a surge in operating expenses (+9% QoQ) on higher electricity cost coupled with lower other gains and losses (-56% QoQ). Spritzer received a one-off flood insurance compensation of RM2mil in 4QFY22.

• The Group Did Not Declare Any Dividend During the Quarter Under Review, as Expected.

• Heightened electricity cost remains a downside risk for Spritzer in the near-term, which we think that price adjustment could be one of the mitigation measures, given its steady market share of 40% - 45%. On a side note, the group has conducted a minor price hike in March 2023 for some of its products.

• Notwithstanding that, we expect better production efficiency on higher yields in 2023 with its new processing plant in Taiping, alongside an additional new line in its Shah Alam plant in 4QFY22, which could support higher utilisation rate.

• For 2024, there are likely 2 new high-speed and fully automated production lines to be added to Spritzer’s Yong Peng and Taiping plants that could boost capacity further from the current 1bil litres.
   
• The group currently trades at an attractive FY24F PE of 12x vs. its 5-year peak of 19x while offering a decent dividend yield of 3%.

Source: AmInvest Research - 31 May 2023