• We recently visited Spritzer factory in Taiping, Perak and remain positive on Spritzer outlook supported by an increase in capacity and stable bottled water demand given the expected revival in tourism activity and an increase in awareness for healthier drinks.

• The recent rise in electricity cost is expected to be offset by lower PET resin raw material prices. For long term outlook, Spritzer highly automated facility may be able to mitigate higher operating cost and maintain its margin.

• Maintain our BUY call on Spritzer with unchanged TP of RM2.60,  based on 14x PER pegged to FY23F EPS.

We recently visited Spritzer factory in Taiping, Perak and the key  takeaways from the visit are:

Annual Production Output Increase to 1bn Liters

Spritzer currently has 3 plants where the main plant is located on a 390- acres rainforest site in Taiping, second mineral water plant in Yong  Peng, Johor to cater for the southern region’s demand and drinking water plant in Shah Alam. Its Taiping plant which we visited is operating on end-to-end automated facility, involving the extraction of mineral water to warehousing, thus increasing efficiency and productivity. Their integrated warehouse is installed with Automated Storage and  Retrieval System (ASRS) with a capacity of 15k pallets and Automated  Guided Vehicles (AVG) replacing forklifts in transporting pallets of bottled water from the production line to warehouse. Spritzer’s plant automation at the site is a notch above its peers and this enables reduction in the number of workforce required. This will improve supply chain effectiveness and help to reduce the carbon footprint.  Currently, Spritzer plants have the capacity of producing 1bn liters/annum from 850 liters in FY21 and is running at c.70% utilization rate.

Stable Spritzer Bottled Water Demand

Spritzer sales growth remains resilient supported by higher capacity, resilient bottled water demand given the expected revival in tourism activity and an increase awareness for healthier drinks as well as hygienic bottled water. Compared to its peers, Spritzer claims that its mineral water is rich with silica content that helps to produce collagen in our body to ensure optimal health by providing benefits ranging from smoother skin to healthier gut. Spritzer is targeting about RM60-70mn capex in FY23 for its plant & equipment as well as new warehouses in  Shah Alam and Yong Peng. The group plans to increase its export sales to Singapore market and has already signed up with a few distributors.  Overall, we estimate revenue to grow further by 4% YoY in FY23F.

Operating Cost Remain Elevated

Operating expenses remain a concern due to higher electricity price which is expected to increase by 40% YoY in FY23, amounting to additional RM6-7mn. However, we believe the impact can be offset by lower packaging raw material cost (packaging cost 70-75% of COGS). Both Polyethylene  Terephthalate (PET) and High-density Polyethylene (HDPE) have tapered down by c.25% and  c.15% respectively from its peak in mid-2022. On the plus side, the group has installed solar PV  in all its 3 manufacturing plants to mitigate the impact of higher electricity costs. Overall we expect EBITDA margin to remain stable at 15.4% in FY23F.

Dividend Policy of 35% Payout

For FY22, Spritzer declared a total of 6.25 sen DPS (vs FY21: 4.5 sen), equivalent to a payout ratio of 35%. In June 2022, the board implemented a dividend policy of not less than 35% of net profit.  We estimate a total FY23 DPS of 6.5 sen, translating into a dividend yield of 2.8%.

Reiterate BUY with TP of RM2.60

We maintain our earnings forecast and BUY call on Spritzer with unchanged TP of RM2.60 based on 14x PER (in-line with Spritzer’s 5-years average forward PER) pegged to FY23 EPS of 18.6sen.  We like Spritzer due to i) defensive business nature, ii) most integrated producer of bottled water, with 40% Malaysia market share, and iii) continuous automation initiatives to enhance productivity. The company also has a healthy balance sheet with net cash positive of RM5.6m and offering a decent dividend yield of 2.8%.

Source: BIMB Securities Research - 22 Mar 2023