We are initiating coverage on SPRITZER with an MARKET PERFORM call and TP of RM2.20 based on FY18E PER of 13.0x. Future earnings from the group are backed by growing export sales while investments in production and warehousing capabilities should improve output and efficiency. The group’s leading market position is expected to sustain given the resilient demand for the group products.

Growing international footprint. The group had ventured into the China and UK markets as a means of expanding its export market base. The move could potentially serve as a buffer against the weak domestic market which has been undermined by poor consumer spending post-GST implementation and unfavourable forex. While operations in China are expected to incur high gestation costs in way of high marketing expenses against the heavy competition, effective initiatives could yield promising prospects given the much larger population base and spending ability, especially in the more developed cities. We do not anticipate a significant shift in forex exposure in the short term as Singapore remains the largest export market (50%) at present.

Enhancing production and warehousing capabilities. For the next three years, the group aims to invest c.RM60-80m to increase the automation of its production lines and key warehousing capabilities. Management aims to expand its production capacity by c.20%. The move should improve economies of scale and subsequently lead to margins expansion. The added capacity could also allow for more aggressive trading of products in China in the near future. Currently, the group has a total production capacity of 650 million litres per annum with an utilisation rate of c.70%.

Market leader with resilient product demand. The group is a leading player in the domestic bottled water market with an estimated 40% share. Backed by three key product brands (i.e. Spritzer, Cactus, Summer) with different price ranges, the group is able to tap into the various consumer segments with different spending habits to spread and sustain its market presence. In addition, the exclusive licensing of the group’s key water well locations make it difficult for new entrants to compete in the market.

We expect FY17 to close with lower earnings at RM23.0m (-5%) despite flattish sales of RM319.4m against RM318.5m in CY16, due to gestation cost from China and higher raw material prices. FY18 is expected to perform better with stronger sales at RM333.2m (+4%) driven by higher export volume and product price increase of c.5% to support local sales margins. Net earnings could potentially record at RM30.3m (+31%) on the back of higher margins in lieu of the said price increase and cost savings from higher production efficiency.

Initiate coverage with an MARKET PERFORM call and TP of RM2.20. Our TP is derived from a 13.0x PER (3-year average Fwd. PER) on FY18E earnings per share of 16.7 sen. The valuation is at a 25% discount from the stock’s small cap beverage FMCG peer, PWROOT of 17.0x PER (3-year average Fwd. PER at +2SD) which we believe is fair given PWROOT’s better dividend potential (i.e. c.6% yield) against the stock’s c.3% yield. We believe the resilience of group’s products and leading market share could sustain the group’s performance in the challenging operating environment.

Source: Kenanga Research - 21 Sept 2017