INVESTMENT HIGHLIGHTS

• 1QFY19 earnings rose higher by +15.2%yoy to RM7.7m, which is within our and consensus expectations

• Upward revision in average selling price helped to partially mitigate rising cost of sales

• China operation recorded improved sales performance and reduction in overhead costs

• Maintain NEUTRAL with a revised TP of RM2.42

Met our and consensus expectations. Spritzer Berhad (Spritzer)’s 1QFY19 earnings improved by +15.2%yoy to RM7.7m. This is within ours and consensus expectations, accounting for 29.1% and 28.7% of full year FY19 earnings forecasts respectively.

Double digit growth in 1QFY19 revenue. Strong revenue growth registered for 1QFY19 rose of +15.3yoy to RM95.1m mainly driven by the increase in: (i) sales volume and; (ii) average selling prices. During the quarter, sales volume increased as customers boosted stock holdings in anticipation of rising consumer demand during Chinese New Year festive period. Meanwhile, average selling prices was increased by about +5.0%yoy due to the spiked in PET resin price.

Net profit margin remained stable. As the higher cost of raw material is passed down to consumers, the rise in cost of sales during the quarter is at +14.0%yoy in line with the growth in revenue. In addition, China operation recorded improved sales performance and reduction in overhead costs. This led to the loss from China’s operation to narrow. Coupled with a lower effective tax rate of 22.6% during the quarter (vs 1QFY18 of 28.7%), this resulted in a stable net profit margin of 8.1% (vs 1QFY19 at 8.1%).

Impact to earnings. We maintain our earnings forecasts as it is still within expectation.

Target Price. We are revising our target price to RM2.42 per share (previously RM2.21) as we rolled forward our valuation based year to FY20. This is based on pegging FY20 EPS of 13.8sen against forward PER of 17.5x.

Maintain NEUTRAL. We remain confident that Spritzer will continue to record stable revenue growth going forward driven by its strong brand equity with more than 40% market share in the bottled water market in Malaysia. In addition, we project a solid growth in sales volume underpinned by the: (i) increasing range of quality bottled water catering for various market segments and; (ii) consumer shifts towards a healthier beverage choice as a consequent of the implementation of excise duty on sugary beverages. Nonetheless, we expect that PET resin prices will continue on an upward trend consistent with the trend of oil prices trend and weaker Ringgit. To account for this, we view that Spritzer’s strategy of manufacturing its own PET preform, bottles and caps coupled with continuous improvement in production efficiency would help to keep cost at bay as compared to its peers. All things considered, we are reiterating our NEUTRAL recommendation on Spritzer.

Source: MIDF Research - 31 May 2019