INVESTMENT HIGHLIGHTS

• Lower sales and higher costs impacted 4Q17 normalised earnings

• Full year FY17 earnings met ours and consensus expectations

• Final dividend declared of 5.5sen per share

• Competition to keep FY18 earnings at bay

• Downgrade to NEUTRAL with a revised TP of RM2.10

Earnings met expectations. Spritzer 4QF17 normalised earnings dropped by -37.2%qoq to RM5.0m. The dropped in quarterly normalised earnings was attributable to: (i) sales in prior quarter was boosted due to the higher demand for bottled water during the SEA Games and ASEAN Para Games; (ii) weaker sales in China’s trading unit of bottle water due to the winter season in that region and; (iii) high operating costs resulted in normalised net profit margin to drop from 13.8% in 3QFY17 to 6.3% in the 4QFY17.

FY 17 earnings impacted both by lower sales and higher costs. Cumulatively, FY17 normalised earnings amounted to RM23.2m. This came in within ours and consensus expectations, accounting for 97% and 99% of full year FY17 earnings forecasts respectively. Note that there is no year-over-year comparison due to the change in financial year end (i.e. from May to December). For FY17, the operating costs remained elevated due to: (i) increase in cost of raw materials such as PET resin and; (ii) high selling and distribution costs for the local and China’s operation.

Final dividend declared of 5.5sen per share. A first and final dividend declared of 5.5sen per share. This represents 50% dividend payout ratio on normalised earnings.

Tough operating environment for FY18. We expect that the group outlook for the year 2018 will remain challenging due to the increasing competition in the local bottled water market and slower than expected product acceptance rate in China. In addition, the rising costs of raw materials particularly PET resin costs in line with the uptrend in oil prices will compress gross profit margin. Additionally, the group is expected to incur higher advertising and promotion expenses to drive up sales.

Impact to earnings. We revised our FY18 earnings forecast downwards by -17.1% due to: (i) expectation of slower turnaround for the China operation; (ii) increase in raw material costs and; (iii) higher advertising and promotion expenses.

Downgrade to NEUTRAL. We downgrade our recommendation to NEUTRAL (previously BUY) a revised target price of RM2.10 (previously RM2.53) per share. We our valuation is based on pegging the FY18 EPS of 12.0sen per share to unchanged forward PER of 17.5x which is a 33% discount to the average PER of other beverage companies listed on Bursa.

Source: MIDF Research - 27 Feb 2018