SPRITZER has proposed a 15% placement which will enlarge its share base to c.210.0m (from c.182.6m) shares. The proceeds from the exercise would primarily be used to fund the construction of a new automated warehouse in Taiping to be completed by 2020 to increase capacity. The funds would secure the group’s long term growth plan at the expense of short-term EPS dilution. We maintain our MARKET PERFORM call and TP of RM2.20 on a new blended PER/PBV valuation.

15% private placement to raise RM63.8m. The group intends to place out c.27.4m shares, which represents 15% of the issued and paid-up share capital to Tasik Puncak Holdings Ltd (“The Placee”), at RM2.33/share or RM63.8m. The Placee is a special purpose vehicle for the Singapore-based private equity firm, Dymon Asia Pte Ltd, which has an established track record in investments, and also possesses operational and strategic value-add experience with companies in Asian consumer and food and beverage industries. The proposed placement is set to be completed by the 4Q17, subject to the approval of Bursa Securities and the shareholders of the group.

Proceeds towards warehouse construction and working capital.

From the RM63.8m to be raised, RM45.0m is to be allocated for the construction of a new automated warehouse in Taiping intended to be completed in three years. To recap, the group had intended to allocate c.RM60-80m to increase the automation of its production lines and warehousing capabilities and improve its 650 million litres per annum capacity by 20%. The remainder of the funds shall be utilised for working capital purposes (i.e. operating expenses and procurement of raw materials).

We are neutral on the impact of the injection of cash into the group’s operations. While this would eliminate funding concerns for the warehouse, which we believed would have otherwise be funded through a mix of debt and internal cash, the exercise may only translate to improving its FY18E net interest expense position of c.RM1.0m to a net interest income position of c.RM0.3m. We do not expect the exercise to shift the operational landscape of the group significantly as we have accounted for the construction of the warehouse on the group’s long term outlook. However, the dilution of share base would erode shareholders’ value in FY18 given the 15% larger share base. We expect FY17 to remain mostly unaffected with the proposed cash call to be completed by 4Q17.

We revise our FY18E earnings by 2.7%, accounting for adjustments towards our net interest income assumptions. The group should be poised to register a net cash position in FY18 with the increase cash resources. However, our dividend expectation for the year is trimmed to 6.0 sen (from 6.5 sen) due to the enlarged share base against an unchanged estimated pay-out ratio of c.40%.

Maintain MARKET PERFORM and TP of RM2.20. Our TP is derived from a revised blended FY18E PER/PBV ratio of 13.0x/1.3x (both based on its average 3-year PER and PBV) from 13.0x FYE18E PER, previously. While the expanded share base would reduce our revised FY18E EPS to 14.9 sen (from 16.7 sen, previously), we believe the stock’s value should also be leveraged on its enhanced book value in lieu of the added security to its future growth plans.

Source: Kenanga Research - 25 Sept 2017