INVESTMENT HIGHLIGHTS

• 3QF18 earnings dropped by -8.2%yoy to RM96.0m mainly due to higher operating expenses

• Despite higher revenue achieved, earnings was dragged by higher cost of sales and S&D expenses

• We expect weaker 4QFY18 earnings in anticipation of lower sales volume and higher raw material price

• Maintain NEUTRAL with an unchanged TP of RM2.27

Earnings came in within expectation. Despite a strong revenue growth of +15.3%yoy, Spritzer 3QF18 normalised earnings dropped by -8.2%yoy to RM7.4m. This brings its 9MFY18 earnings to RM20.8m which is broadly within ours and consensus expectations, accounting for 82.0% and 74.0% of full year FY18 earnings forecasts respectively.

Revenue for the quarter rose by +15.3%yoy. Revenue for 3QFY18 rose by +15.3%yoy to RM96.0m mainly driven by the increase in volume of bottled water sold. During the quarter, sales volume increased due to the; (i) successful sales campaigns, incentives plan, and special discounts; (ii) tax holiday spending; (iii) customers increased stock holdings in anticipation of price adjustments as well as; (iv) improved sales performance from China operations.

Earnings dragged by higher operating expenses. The increase in raw material costs such as polyethylene terephthalate (PET) resin, following the trend of oil prices coupled with the 10% sales tax imposed on raw materials and consumables effective from 1 September 2018 caused the cost of sales to rose by +23.0yoy. In addition, operating expenses rose by +12.0%yoy due to the increase in selling and distribution expenses in order to entice customer to spend during tax holiday period.

Impact to earnings. We maintain our FY18F and FY19F forecast at this juncture as our estimates are still within expectation.

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. In the near term, we are expecting a weak 4QFY18 earnings in view of the: (i) higher PET resin cost; (ii) temporary lower sales volume resulting from the increase in retail prices and (iii) slower demand in China due to winter season. Nonetheless, we favour Spritzer’s strong brand equity in the local market which has been instrumental in sustaining its earnings performance. Also, we view that Spritzer’s strategy of manufacturing its own PET preform, bottles and caps would help to keep cost at bay as compared to its peers. Meanwhile, we expect that the loss from China’s will gradually reduce as the group’s revamped its marketing strategy to be more consumers centric. All things considered, we are reiterating our NEUTRAL recommendation on Spritzer.

Source: MIDF Research - 22 Nov 2018