KEY INVESTMENT HIGHLIGHTS

• Analyst Briefing
• Capacity boosts support growth momentum
• Bottled water dominates while sparkling gains traction
• Bonus issue to boost liquidity
• RA tax incentive expiry may pressure margin
• Maintain BUY with and revised TP of RM3.25 (from RM3.54)

We attended Spritzer's 3QFY24 analyst briefing, and we remain positive on the outlook for the company. Key highlights of the briefing as below:

Capacity boosts support growth momentum. Spritzer made significant strides in production capacity. Its newly installed sparkling water line, operational since October 2024, contributes an additional 50m liters per year. This expansion supports the company's aim to introduce more SKUs and diversify its product portfolio to meet evolving consumer preferences.

Strategic capex investments to drive growth. Spritzer's capex for 3QFY24 reached RM36.3m, bringing the year-to-date total to RM74.3m, in line with the FY24 budget range of RM70-80m. Key investments include the installation of a new sparkling water production line, which was commission in October 2024, adding 50m litres of annual capacity.

Additionally, the company expanded its warehouse capacity to support growing demand. Looking ahead, management indicated that FY25 capex will be lower than FY24's allocation, given the significant investments made this year, including three new production lines. Management plans to focus on upgrading the Automated Storage and Retrieval System (ASRS) in FY25, while maintaining its annual maintenance capex at RM5m. These investments enhance production efficiency and storage capacity, ensuring readiness to meet rising demand.

Bottled water dominates while sparkling gains traction. Mineral water continues to anchor Spritzer's revenue, accounting for 79% of sales. However, the sparkling water segment, though currently contributing only 1.9% of revenue, shows strong growth potential.

Recent product launches, such as the 1 litres sparkling lemon flavor, and campaigns promoting zero-sweetener sparkling water demonstrate management's focus on innovation and capturing a larger share of this nascent market. With sparkling water sales contributing just 2% of total revenue, there is ample room for growth driven by rising demand and a low base.

Export sales remained small but better margin. Export sales contributed 8% of total revenue, primarily to Singapore. Among the company's brands sold internationally, the Spritzer brand takes precedence due to its higher margins. Management aims to deepen market penetration in Singapore, leveraging its strong brand equity.

Cost management drives profitability. On the cost front, PET resin prices averaged RM4.50/kg in 3QFY24, with stability supported by a strong Ringgit and Brent crude oil prices under USD90/barrel. This trend bodes well for gross profit margins moving forward. Additionally, renewable energy initiatives contributed RM544k in cost savings during 3QFY24, reflecting operational efficiency and sustainability goals.

Bonus issue to boost liquidity. Spritzer proposed a 1-for-1 bonus issue on 27th November 2024, aimed at enhancing liquidity and shareholder value, with completion targeted in 1QCY25. Post-issuance, the theoretical ex-bonus price for Spritzer's shares is expected to be RM1.66.

RA tax incentive expiry may pressure margins. Management highlighted that Spritzer may no longer benefit from the Reinvestment Allowance (RA) tax incentive next year, as Malaysia's RA tax policies will shift focus away from automation- related initiatives. Without this tax advantage, Spritzer will likely incur the standard corporate tax rate, leading to potential margin compression.

Revised earnings forecast for FY25-26F. In light of the impending RA tax incentive expiry, we have revised our FY25- 26F earnings forecasts downward by -11% to reflect higher tax assumptions.

Maintain BUY with a lower TP of RM3.25. Post earnings revision, we maintain our BUY recommendation with a revised TP of RM3.25 (previously RM3.54). This is based on a revised FY25F core EPS of 21.9 sen and an updated PE valuation, transitioning from a 2-year to a 3-year historical average to better reflect the medium-term outlook. We apply a PER of 14.8x to the FY25F EPS. At the current share price of RM2.91, Spritzer is trading at a FY25F PER of 13.3x, which is below its three- year historical average of 14.8x.

Outlook. Looking ahead, Spritzer is well-positioned to benefit from strong demand drivers, including increased household spending, a tourism revival, higher out-of-home activities, and prolonged hot weather conditions. The group's focus on expanding distribution channels, particularly in the Singapore market and the HoReCa segment, alongside premium product offerings, is expected to solidify its market position further. Stable raw material prices, particularly for PET resin, provide an additional cushion for margin stability.

Downside risks are: (i) a further increase in Polyethylene terephthalate (PET) resin prices, (ii) supply chain disruptions, and (iii) higher-than-expected logistic costs.

Source: MIDF Research - 3 Dec 2024