• Overall, FY18 net profit of RM24m was disappointing coming in below our estimates and consensus at 87% and 90% respectively.
• FY18 net profit fell by 5% yoy due to increase in manufacturing and operating costs despite an 11% expansion in revenue.
• Its 4Q18 net profit decreased by 54% sequentially due to significant rise in raw materials and packaging materials.
• We maintain Hold recommendation with TP of RM2.25 by applying a PE of 16x on FY19 EPS.

Full year earnings impacted by manufacturing costs

Spritzer’s FY18 revenue increased 11% to RM348m yoy attributed to the increase in average selling price and increase in sales. Sales were higher due to successful sales campaign and above-average hot weather. However, net profit registered was lower at RM24m (-5% yoy) which makes up 87% of our full year forecast. Increase in cost of sales and operating expenses led to lower profit margin of 6.9% from 7.2% in FY17.

QoQ earnings increased due to lower expenses

On qoq basis, revenue decreased to RM85.5m (-11%) due to a decline in sales volume for domestic market as there was a markedly higher sales registered during 0% GST period in 3Q18. PBT saw a decline of 53% to RM4.2m attributed to higher cost in raw and packaging materials. Consequently, net profit is also weaker by 54% to RM3.4m with net margin declining to 4% (-3.7 ppts).

Moderate outlook despite cost pressure

Spritzer’s FY18 revenue offered a positive outlook which further cemented their premium branding despite the generic nature of the product. Although the overall market for bottled mineral/drinking water is anticipated to continue growing, we expect Spritzer’s revenue growth from here will soften to around 6-7% pa due to market saturation. Further, increase in material cost, namely raw materials and packaging cost, may impact Spritzer’s future earnings. On the positive side however, the strengthening of ringgit may partly mitigate the cost pressure.

Disappointing dividends

A first and final dividend per share of 3.5 sen was declared, which is substantially lower than 5.5 sen paid for FY17. We expect DPS to increase to 6.0 sen for FY19 as earnings improve.

Maintain Hold with TP of RM2.25

We maintain our FY19 and FY20 earnings forecast. Our TP remains unchanged at RM2.25 which is derived by applying a PE multiple of 16x on its FY19 EPS of 14 sen.

Source: BIMB Securities Research - 26 Feb 2019