KEY INVESTMENT HIGHLIGHTS

• 1HFY20 earnings above expectation

• 2QFY20 net profit plunged by -74.6%yoy to RM2.0m due to the MCO

• Sales is expected to improve with more people leaving home and dining in restaurants

• Earnings revised by +18.0% for FY20E

• Upgrade to TRADING BUY with an unchanged TP of RM2.15

1HFY20 earnings above expectation. Spritzer’s net profit of RM10.8m for the 1HFY20 made up 60% of our full year estimates and 45% of consensus. No dividend was declared during the quarter, which is expected.

2QFY20 net profit plunged by -74.6%yoy to RM2.0m due to the MCO. The restriction in movement had reduced the demand for bottled drinking vastly as most people stayed at home. The extended movement control order (MCO) led to sales dropping by -42.6%yoy. Sequentially, net profit plummeted by -77.0%qoq on the back of sales that declined by -41.4%qoq. We had anticipated for a sharp decline this quarter due to the expected decline in demand for bottled drinking water. Going forward, we expect sales from the hotel, restaurant and café segment to improve as more people dine out after they resume work on-site. Topping, that, Spritzer should continue to benefit from low raw material price for packaging.

Earnings revised by +18.0% for FY20E but unchanged for FY21F. This is due to the better than expected results of 2QFY20. While we believe that sales and net profit will continue to improve further in 2HFY20 as more people go out. That said, we do not expect sales to revert to pre-pandemic level for FY20F as consumers may continue to stay indoor more than before. We believe that demand may likely recover to a more normalised level in FY21F, which is why we maintain our FY21 earnings estimates for now.

Upgrade to TRADING BUY with an unchanged TP of RM2.15. Our unchanged valuation of 17.5x PER to FY21F EPS of 12.3sen is maintained. We upgrade the stock to TRADING BUY as we believe that the retracement in share price provides trading opportunity. This supported by further recovery ahead and favourable raw material costs for packaging. We believe that Spritzer will be able to sail through any potential challenges ahead due to its strong balance sheet and healthy cash flow. Its cashpile was higher as of end June at RM19.4m compared to the previous quarter. Dividend yield is estimated at 1.8%

Source: MIDF Research - 27 Aug 2020