• MYR0.85 FV based on 13x FY25F (Jun) P/E. At MYR0.65/share, Life Water is set to raise MYR63.4m (126m shares) from its IPO, mainly to fund working capital and expand its manufacturing capacity to capture new business opportunities in the beverage industry. Future earnings (3-year CAGR: 21.2%) are expected to be fuelled by aggressive expansion plans, new product launches, and entry into new markets, supporting sales growth and margin expansion. The IPO price implies 10x FY25F P/E.

• Doubling capacity. With the expected commencement of its Keningau plant by Dec 2024, coupled with the setting up of two new drinking water manufacturing lines in Sandakan, Life Water is set to double its total annual production capacity for drinking water from 389m litres currently to 804m litres by 2027. This expanded capacity will enable the group, in our view, to grow its customer base, enter new markets, achieve economies of scale, and increase its market share (11% currently).

• Wide distribution network. Life Water's key strength lies in its localised brand presence and extensive distribution network of >4,000 touchpoints across Sabah’s retailers and wholesalers, ensuring exceptional convenience and accessibility for customers. Looking ahead, the group plans to leverage this robust network to penetrate new markets in Sarawak and Brunei by tapping into local distributors’ established networks and local expertise, and facilitating efficient expansion without incurring significant capex.

• Expansion of beverage products. Life Water plans to expand its products lineup by introducing a new range of flavoured drinks and mineral water offerings. The group is currently developing recipes for its flavoured drinks and has conducted a trial production run for one batch of flavours. It aims to launch these flavoured drinks to existing customers – including retailers, wholesalers, and food service operators – in Sabah by 2HCY25. Simultaneously, Life Water is exploring suitable groundwater sources for its mineral water products, with the estimated timeline for commercialisation dependent on the progress of this exploration and development.

• Capturing demand from the tourism rebound. According to the Sabah Tourism Board, tourism arrivals in the state have increased by 24.3% YoY in 1HCY24, reaching 62% of pre-pandemic levels. As tourism continues to rebound, we expect demand for bottled water and beverages to rise, which will benefit Life Water, thanks to its robust distribution network across key tourist hotspots, and established relationships with hotels and retail outlets.

• Valuation. We derive a FV of MYR0.85 based on an ascribed 13x P/E on FY25F earnings – in line with its smaller-cap peers. We believe this is justifiable despite its lower market cap, given Life Water’s higher ROE, stronger margins, and solid earnings growth trajectory vis-à-vis such peers. Key risks include fluctuations in raw material prices and expansion plan delays.

Source: RHB Securities Research - 30 Oct 2024