We are issuing a “Not Rated” call on SPRITZER with FV range of RM2.31-RM2.75 (on the back of 70-80% plant utilisation rate assumptions), based on 11.5x FY17E PER. SPRITZER enjoyed a 3-year net profit CAGR of 29.1% from FY12-FY15 pumped by upgrade in production capacity and better product mix. We project 10.1%/13.4% earnings growth in FY16E/FY17E, driven by further expansion in production capacity. However, its current share price may be already reflective of the above catalysts.

Malaysia’s bottled mineral water pioneer. SPRITZER is a leading brand in Malaysia for the manufacturing and distribution of bottled mineral water. The Spritzer Group, backed by its assortment of bottled water products, caters to more than 40% of the domestic market share.

Riding on the increasing demand for bottled water, SPRITZER recorded a 3-year (FY12-FY15) CAGR in sales and net profit (NP) of 12.5% and 29.1%, respectively. The growth is attributed to upgrades and expansion of its integrated manufacturing facilities, resulting in an increased annual capacity of c.600m litres annually (from c.500m litres in FY15) with an estimated utilisation rate of c.70%. In addition, the Group enjoyed PBT margin expansion from 11.3% in FY13 to 12.6% in FY15 thanks to the growth in product mix extending beyond bottled mineral water to cater to a wider range of social demographics.

2H16 is expected to outperform 1H16, as we project better sales due to seasonality factors during this period. This is also supported by historical precedents in FY13-FY15 where the second half of the financial year reported notable improvements compared to first half. We assume product prices in our forecasts to be inline with FY14-FY15’s estimated average and project 2H16 to record RM164.0m in sales following 1H16 sales of RM132.3m. Backed by better efficiency and sales volume, FY16E is poised to achieve net sales of RM278.1m (+9.6% YoY) with PBT and NP of RM36.3m (+13.4% YoY) and RM25.9m (+13.4% YoY), respectively. With the FYE change to December in 2016, we believe SPRTIZER’s performance could carry on to the 19M16 period with RM457.4m revenue, and RM42.5m NP, representing growth against FY15 of 80.3% and 86.4%, respectively.

Moving forward, we believe the existing cornerstone of the Group is capable of driving its performance backed by plenty of expansion space in terms of production levels (current utilisation rate stands at c.70% of 600m litres). FY17E is expected to generate RM306.1m revenue, PBT of RM38.7m and an ending NP of RM27.6m, representing YoY growth of 10.9%, 9.9% and 10.2%, respectively against FY16E. However, we will like to give consideration in the event SPRITZER raises its utilisation rate to c.80% with a net effect of FY17E EPS of 23.9 sen.

Not rated, however, we believe SPRITZER should be valued within a range of RM2.31-RM2.75 (or RM2.53 on average), implying a FY17E PER of 11.5x (broadly in-line with the FY15-FY17E NP CAGR of 11.8% and historical 3-year PEG ratio of c.1.0x). This is based on our FY17E EPS of 20.1-23.9 sen from the plant utilisation rate assumption of 70%-80%. We foresee a dividend payout of 25% of NP to be applied for FY16E/FY17E, seeing that management had consistently paid close to this rate in prior years, giving investors 4.6 sen/5.0-5.7 sen or 1.8%/1.9-2.2% dividend yield. This appears unattractive when compared to a peer, Power Root which provides a prospective yield of 4.6%. 

Source: Kenanga Research - 11 May 2016