KEY INVESTMENT HIGHLIGHTS

• Water disruption in Klang Valley

• Expect sudden spike in demand

• Bodes well for sales and bottomline

• Earnings revised by +7.1% for FY20 and +8.9% for FY21

• Reiterate TRADING BUY with a revised TP of RM2.34

Water disruption in Klang Valley. Up to 1.2 million water account holders in the Klang Valley are estimated to have been affected by the water disruption over the weekend. The unscheduled water disruption was reportedly caused by industrial effluent pollution at Sungai Selangor that affected households and businesses.

Expect sudden spike in demand. Bottled water saw brisk sales as food and beverage operators, and households rushed to buy bottled water as a result of the water disruption which started since last Thursday. Bottled water was sold out in some convenience stores and hypermarkets as those who were affected by the water disruption rushed to stock up on clean water. We believe that food and beverage business operators are likely to consume bottled water so that they can continue to operate their businesses over the weekend. On the other hand, some households may stock up on bottled but may not fully utilize their purchases due to panic buying.

Bodes well for sales and bottomline. Although the water disruption may be short-lived, we believe that the spike in demand bodes well for Spritzer’s top and bottomline as it is a market leader for bottled water with more than 40% of market share. Previously, we opine that 2HFY20 sales recovery will be gradual as more people stay indoors. However, the water disruption acted as a catalyst for sales recovery. We also believe that consumers may stock up on extra bottled water at home. As such, we revise our FY20E earnings by +7.1% and FY21F earnings by +8.9%. 

Reiterate TRADING BUY with a revised TP of RM2.34 (previously RM2.15). Our unchanged valuation of 17.5x PER is pegged to our revised FY21F EPS of 13.4sen following our earnings adjustment. We opine that Spritzer’s outlook is stable and its sturdy balance sheet is likely to help it sail through a challenging operating environment. It has net cash of RM19.4m as of end-June. Dividend yield is estimated at 2.0%.

Source: MIDF Research - 7 Sept 2020