• Overview. Spritzer’s 3Q22 earnings increased encouragingly by 50%  QoQ was mainly due to i) higher revenue on strong sales and full impact of price hikes, ii) improved economies of scale, and iii) lower effective tax rate of 8.7% (-13.8 ppts QoQ) from reinvestment allowances claims on plant and machinery. Hence, profit margin improved by 2.4-ppts QoQ. Cumulatively, 9M22 earnings jumped by 59% YoY on the back of strong sales of bottle water in line with economic recovery and a revival in tourism industry.

• Key highlights. Segmental-wise, 9M22 manufacturing and trading segment revenue surged by 41% and 37% YoY respectively thanks to  higher average selling price (ASP) and sales volumes following full economic reopening.

• Against estimates: Above. 9M22 net profit of RM25.7mn (+59% YoY), made up 99%/86% of our/consensus full year forecast. The positive deviation against our estimate was mainly due to the stronger-than-expected sales as well as lower-than-expected effective tax rate.

• Earning revision. We adjust higher our earnings forecast for FY22-FY24F by 18%-31% to account for higher bottled water sales and reduced tax rate.

• Outlook. We remain cautious on Spritzer near term outlook as consumers may switch to drinking water which have lower margin due to inflationary pressures. Long term sales growth remains stable however supported by increase awareness in healthier drinks and hygienic bottled water. Meanwhile, their China operation is expected to continue operating at a loss in the next quarter no thanks to prolonged COVID-19 lockdown measure, greater competition from local brands as well as higher costs.

• Our call. Reiterate a HOLD call with higher TP of RM2.25 (from RM1.95)  based on 13x PER (0.5-SD below Spritzer’s 5-years average forward PER) pegged to FY23 EPS of 17.3sen. We estimate a 5.7sen DPS for FY22  (payout of c.35%), translating into a dividend yield of 2.7%.

Source: BIMB Securities Research - 30 Nov 2022