1Q18 net profit of RM6.8m (+35%) is within our estimate but above consensus, in anticipation of stronger seasonal quarters. The absence of dividends was also expected. SPRIZTER’s near-term outlook for recovering domestic demand coupled with easing losses from China could drive earnings growth. Longer-term excitement could be helmed by the commissioning of its new warehouse by FY20. Maintain MARKET PERFORM and TP of RM2.50.

1Q18 earnings within expectations. 1Q18 net profit of RM6.8m accounts for 22%/26% of our/consensus estimates. We view this as within our estimates but above consensus in lieu of seasonal strength in coming quarters. The lack of dividends was expected, as the group typically pays a single year-end dividend.

YoY, 3M18 saw better sales at RM82.5m (+14%) as higher volume was likely driven by a more favourable product mix from new introductions (i.e. 300ml bottled water variants, rebranded niche products). A price increase implemented during 2Q17 also boosted sales returns. A stronger EBITDA of RM13.2m (+28%) and margins of 16.0% (+1.7ppt) could led by thinning losses from China operations from better cost management. This translated to 35% growth in 3M18’s net profit to RM6.8m.

QoQ, 1Q18 sales improved by 4% compared to 4Q17 as demand could have been stimulated by new offerings. In 4Q17, the company recognised one-off gains through revaluation of investment properties and reversal of donation claims provision amounting to RM1.7m. Adjusting for this, 1Q18’s core net profit saw an expansion of 22% from RM5.6m.

Hopeful for pipes to stay clear. Local demand is looking to be stimulated by better product mixes with the recovering consumer confidence in the market. This will likely stem from: (i) a strengthening domestic currency, and (ii) zero rating of GST to lower retail prices. While China operations are still generating losses, management is hopeful for a turnaround with a transitioning of strategies, emphasising on direct selling in contrast to banking on marketing-led demand. This could mitigate potential compression of margins in the near-term as packaging costs (i.e. PET resin) are looking to rise following unfavourable price trends. In the longer term, the construction of the new automated warehouse could expand capacity and economies of scale. The warehouse is earmarked to be operational by FY20.

Post results, we tweak our FY18E/FY19E earnings by +0.4%/-1.5% as we incorporated FY17’s audited numbers into our model.

Maintain MARKET PERFORM with an unchanged TP of RM2.50

Our TP is based on a targeted 16.0x FY19E PER which is closely in line with the group’s 3-year mean. We believe the improving fundamentals of the stock are yet to be reflected in its share price, possibly due to the soft trading sentiment. Current valuations also appear inexpensive as the stock appears to be trading at an implied 14.9x PER on its FY19E earnings.

Risks to our call include: (i) poorer-than-expected sales, (ii) higherthan-expected costs exposure, (iii) delay in the construction of the new automated warehouse.

Source: Kenanga Research - 31 May 2018