1H18 net profit of RM13.5m (+33%) is within our estimate but above consensus, in anticipation of stronger seasonal quarters. The absence of dividends was also expected. While SPRIZTER appears to enjoy better domestic demand with new products with margins supported by previously implemented price increase, the 10% sales tax on mineral water products may be a negative. Maintain MP and TP of RM2.50, for now.

1H18 as expected. 1H18 net profit of RM13.5m accounts for 43%/51% 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, 1H18 sales improved by 10% to RM166.2m thanks to growing demand, likely driven by newer concept and repackaged product variants. The price increase during the preceding year is likely to have boosted the group's EBITDA by 28% at RM18.9m. This translates to a margin expansion to 11.4% (+1.7ppt). This was offset by continued losses from China trading operations, albeit with narrowing operating losses at RM1.7m (from RM5.2m in 1H17). Net earnings closed at RM13.5m (+33%) after lower effective taxes at 28.7% (-2.4ppt).

QoQ, 2Q18 revenue was flattish at RM83.8m (+1%) from 1Q18. However, net profit of RM6.7m (-2%) was a result of slightly higher operating expenses, which we suspect could be from marketing expenses to stimulate sales in a softer seasonal environment in 2Q18.

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. 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), which are looking to rise following unfavourable price trends. In the longer term, while the construction of the new automated warehouse could expand capacity and provide economies of scale. The warehouse is earmarked to be operational by FY20. With regards to the new sales tax, it appears that mineral water products are marked for a 10% tax. However, we reserve making adjustments to price increases or potential shifts in demand, pending an update from management.

Post results, we leave our assumptions unchanged for FY18-19.

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 14.8x PER on its FY19E earnings.

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

Source: Kenanga Research - 29 Aug 2018