KEY INVESTMENT HIGHLIGHTS

• 9MY24 core earnings above expectations
• Revenue growth underpinned by manufacturing and trading segments
• Improved profitability driven by manufacturing efficiency
• Upgrade to BUY with and revised TP of RM3.54 (from RM2.78)

Above expectations. Spritzer chalked in 3QFY24 revenue of RM146m (-0.4%qoq; +10.1%yoy) and core PATANCI of RM20.9m (+3%qoq, +20.7%yoy) which brought 9MFY24 core PATANCI to RM56.6m (+54.9%yoy). This came in above our full-year FY24 forecast and consensuses at 91% and 86% of full-year expectations respectively. The earnings surprise was due to higher-than-expected water bottle volume sales and better margin from stable raw material costs. No dividend was declared this quarter, as dividends are typically declared in the 4Q.

Revenue growth underpinned by manufacturing and trading segments. Spritzer's 9MFY24 revenue increase of +16.9%yoy was supported primarily by the manufacturing segment, which saw revenue grow +17.1%yoy to RM408.9m. This was driven by higher bottled water sales, reflecting resilient consumer demand. The trading segment also contributed positively, with revenue improving +11.6%yoy to RM17.5m, benefiting from stable sales activity.

Improved profitability driven by manufacturing efficiency.

Spritzer's 9MFY24 core PATANCI surged +54.9%yoy to RM56.6m, supported by strong revenue growth, lower raw material costs, and enhanced operational efficiency. The manufacturing segment was a key driver, with operating profit rising +18.7%yoy to RM60.5m. This was achieved through higher sales volumes and reduced production costs, thanks to economies of scale from new production lines. As a result, the group's core PATANCI margin expanded to 13.2% (9MFY23: 10.0%), while EBIT margin improved to 14.4% (9MFY23: 13.6%).

Earnings estimate revised upwards. Given that 9MFY24 is above our estimates, we raise our FY24-26F earnings forecasts by +20%/+27%/+35%, mainly to account for higher sales, improved operational efficiencies from new production lines, better sales mix with premium products, and stable raw material costs.

Upgrade to BUY with a higher TP of RM3.54. Post earnings revision, we raise our TP to RM3.54 (from RM2.78) based on revised FY25F core EPS of 24.5sen and an unchanged PER of 14.4x, which aligns with Spritzer's 2 years historical PER of 14.4x. At the current share price of RM2.85, Spritzer is trading at a FY25F PER of 11.6x, offering an attractive valuation compared to its three-year historical average of 14.8x.

Outlook. Looking ahead, we anticipate sustained demand for Spritzer's bottled water, supported by increased household spending, a tourism revival, higher out-of-home activities, and prolonged hot weather conditions. These demand drivers, coupled with the group's ongoing focus on economies of scale, sustainable packaging solutions, and premium product offerings, are expected to solidify its market position further. Additionally, stable raw material prices, particularly for PET resin, will help maintain 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 - 28 Nov 2024