KEY INVESTMENT HIGHLIGHTS

• 1QFY20 earnings within expectation

• Net profit of RM8.8m was 14% higher yoy

• Expect weaker 2QFY20 due to extended MCO

• Earnings revised by 46%/28% for FY20E/FY21F

• Downgrade to NEUTRAL with an adjusted TP of RM2.15 (previously RM2.73)

1QFY20 earnings within expectation. Spritzer’s net profit of RM8.8m for the first quarter was 26.9% of our full year estimates and 29% of consensus’.

Net profit of RM8.8m was +14%yoy higher even though revenue dipped by -2% to RM92.8m. This was mainly due to lower raw material costs as well as lower operating expenses. Operating expenses fell by - 7%yoy. Spritzer’s operations during the movement control order (MCO) continued as it is deemed essential albeit with a smaller workforce and in compliance with the standard operating procedures set by the government. Tax expenses during the quarter were higher year-on-year mainly due to Employee’s share Grant Plan and adjustment in deferred tax.

Expect weaker 2QFY20 due to extended MCO. During the first quarter, the MCO which started from March 18, did not affect the company’s performance much. However, as the MCO was extended further to April and May, we expect sales to be adversely impacted as people stay at home and drink less bottled water. We believe demand will recover gradually when more people go out and resume outdoor activities as well as starting to dine out. Cushioning the negative impact of lower sales will be lower raw material prices.

Earnings revised by -46%/-28% for FY20E/FY21F. In view of a weaker 2Q and time required for sales to pick up again, we expect Spritzer’s full year performance to be softer compared to FY19. As such, we trim our earnings estimates to include the sluggish sales anticipated for the MCO period. Looking ahead, we expect demand to recover over time as people adjust to the new norm.

Downgrade to NEUTRAL with an adjusted TP of RM2.15 (previously RM2.73). We peg our unchanged valuation of 17.5x PER to FY21F EPS of 12.3sen in view of the challenging business environment in the coming quarters. Having said that, we believe that Spritzer will be also to sail through any potential challenges ahead due to its strong balance sheet and healthy cash flow. Net cash as of March 31 stood at RM17.5m. Dividend yield is estimated at 1.8%.

Source: MIDF Research - 25 Jun 2020