• 1HFY17 results largely within expectation

• Stronger domestic performance in 2QFY17 offsets weakness in China

• Higher ASP and SEA Games could boost 3Q performance

• Maintain BUY and TP of RM2.83

1HFY17 results largely within expectation as net profit made up 45% of our full year forecast and 43% of consensus. We expect brighter prospects in 2HFY17 due to stabilising PET prices, stronger sales from Malaysia and lower marketing expenses in China. There is no yoy comparison due to the change in financial year end.

Stronger domestic performance in 2QFY17 offsets weakness in China. Sequentially, net profit improved by 2.4% to RM5.1m from RM5.0m in the previous quarter. This is due to an 8% increase in sales to RM78.5m as well as raw material prices that have eased by about 5%. Sales improved qoq due to the Hari Raya celebration.

Higher ASP and SEA Games could boost 3Q performance. Spritzer has also revised the selling prices for some of its products by not more than 5%. We are positive on the price adjustment as it will enhance average selling prices as well as profit margins. We believe that sales volume should remain stable due to minimal increase in prices. Spritzer is also a sponsor of the SEA Games, which is happening now and the promotional activities could drive higher volume and sales.

Losses in China expected to narrow in the second half. As anticipated, Spritzer is still incurring losses in China due to the higher marketing activities there in conjunction with summer. In 2Q, its trading unit in China made a loss of RM2.4m. We expect losses to narrow to in the next two quarters as Spritzer scale down its advertising and promotional activities in the cold season.

Maintain BUY recommendation and TP of RM2.83. We maintain our FY17F and FY18F net profit estimates of RM22.7m and RM30.4m respectively. As a result, we maintain our TP based on unchanged PER of 17x FY18F EPS of 16.6 sen. We like Spritzer for its i) resilient earnings due to its defensive business model, ii) strong position as market leader in Malaysia’s bottled water industry and iii) strong balance sheet with net cash position as of end-FY16.

Source: MIDF Research - 24 Aug 2017