INVESTMENT HIGHLIGHTS

• 1QF18 earnings rose by +37.3%yoy to RM6.8m

• Higher sales boosted by hot weather and water rationing

• Earnings were lifted by better cost management

• Nevertheless, tough operating environment to persist

• Maintain NEUTRAL with a revised TP of RM2.27

Earnings within our expectation. Spritzer 1QF18 normalised earnings rose by +37.3%yoy to RM6.8m. This came in within ours and consensus expectations, accounting for 26.9% and 24.1% of full year FY18 earnings forecasts respectively.

Higher sales boosted by hot weather and water rationing. The revenue for 1QFY18 increased by +13.7%yoy to RM82.5m. This was mainly attributable to the: (i) higher sales volume as a consequence of hot weather and water rationing in Selangor which occurred in March 2018 and; (ii) revision of selling prices for some of its products by not more than +5.0%yoy from 2QFY17.

Earnings were lifted by better cost management. The increase in raw material costs, particularly prices of polyethylene terephthalate (PET) resin, following the trend of oil prices caused the cost of sales to rise by +16.0%yoy. Nevertheless, the increase in costs was mitigated by the revision of selling prices last year. In addition, operating expenses reduced by -7.0%yoy as Spritzer’s trading unit in China incurred a lower selling and distribution costs. This was due to the lower advertising and promotion activities during winter season in China.

Tough operating environment for FY18. Despite the commendable 1QFY18 result, 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 slow product acceptance rate in China. We expect that China’s trading operation will take longer than the original stipulated timeframe of three years to breakeven. The group is expected to remain committed to invest in advertising and promotion activities to drive up sales in Chinese market. In addition, the rising costs of raw materials particularly PET resin in line with the uptrend in oil prices will continue to compress gross profit margin.

Impact to earnings. We made no change to FY18 earnings estimate. However, we are revising our FY19 earnings estimates downward by –10.0% as we input: i) profit margins compression in view of the increase in raw material costs; and ii) longer gestation period for the China operation.

Maintain NEUTRAL. We are maintaining our NEUTRAL recommendation on the stock with a revised target price of

RM2.27 (previously RM2.10) per share as we rolled forward our valuation base year to FY19. This is based on pegging FY19 EPS of 13.0sen against forward PER of 17.5x.

Source: MIDF Research - 31 May 2018