KEY INVESTMENT HIGHLIGHTS

• 3QFY19 earnings came in at RM9.2m (+24.4%yoy) which exceed our and consensus’ expectation

• Earnings was lifted by the reduction in PET resin cost of more than -20.0%yoy

• Expect a strong performance in 4QFY19 as the group will continue to benefit from a lower raw material cost

• Upgrade to BUY with a revised TP of RM2.73

Solid 3QFY19 performance. Spritzer 3QFY19 earnings rose by +24.4%yoy to RM9.2m. This brings its cumulative 9MFY19 earnings to RM24.7m which exceeded ours and consensus expectations, accounting for 93.4% and 86.3% of full year FY19 earnings forecasts respectively.

Lower PET resin cost expanded profit margins. Despite a marginal increase in revenue of +1.3%yoy to RM97.5m, the group’s 3QFY19 earnings was significantly lifted by a lower raw material cost. During the quarter, PET resin cost reduced more than -20.0%yoy or about RM1,100/MT in line with the downtrend in oil prices. Note that approximately 70.0% of Spritzer’s cost of sales are in packaging. Breaking this down further, about 50.0% of packaging cost is made up of PET resin cost. Consequently, 3QFY19 net profit margin expanded by about +2.0ppts to 9.4%. Coupled with the reduction in loss from China’s operation, this resulted in 3QFY19 earnings to grow by double digit.

Impact to earnings. We are revising our FY19F and FY20F upwards by +23.0% and +13.1% respectively to take into account the lower PET resin cost as the group has an existing inventory of PET resin at low cost that can last about a quarter. In addition, the group is expected to benefit from the relatively cheaper PET resin going forward as the spot price is approximately at RM3,600 per metric tonne (vs FY18 average of more than RM4,000 per metric tonne).

Target Price. We are revising our target price to RM2.73 per share (previously RM2.42). This is based on pegging FY20 EPS of 15.6sen against forward PER of 17.5x.

Upgrade to BUY. 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.

Source: MIDF Research - 28 Nov 2019