INVESTMENT HIGHLIGHTS

• 2QF18 earnings rose by +30.2%yoy to RM6.7m mainly due to increase in volume of bottled water

• Growth of cost of sales and operating expenses was in in line with the growth in revenue

• Outlook remain challenging

• Maintain NEUTRAL with an unchanged TP of RM2.27

Earnings within expectations. Spritzer 2QF18 earnings rose by +30.2%yoy to RM6.7m. This brings its 1HFY18 earnings to RM13.5m which is within ours but below consensus expectations, accounting for 53.0% and 48.0% of full year FY18 earnings forecasts respectively.

Revenue for the quarter rose by +6.5%yoy. Revenue for 2QFY18 rose by +6.5%yoy to RM83.6m. The group recorded increase in volume of bottled water sold locally as a result of sales campaigns and special discounts offered on bottled water just before and after GST was zerorated on the 1st June 2018. In addition, the group’s China operations also showed improvement in sales performance.

Earnings were lifted by prudent cost management. The increase in cost of sales (+14.0%yoy) in 2QFY18 was mainly due to the increase in raw material cost, in particular polyethylene terephthalate (PET) resin cost which is in line with the uptrend of oil prices. Nonetheless, other operating expenses decreased by -8.0%yoy due to better overall cost control and lower advertising and promotion cost incurred in China.

Target Price. Our target price remains unchanged at RM2.27 per share. This is based on pegging FY19 EPS of 13.0sen against forward PER of 17.5x.

Maintain NEUTRAL. Despite the commendable 2QFY18 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 profit margin. Due to this, we are reiterating our

NEUTRAL recommendation on Spritzer.

Source: MIDF Research - 29 Aug 2018